Meta Platforms Settles Major Lawsuit, Pays $18 Billion

0:01Tyler Crowe:Meta Platforms dodges a$1.4 trillion bullet. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Rachel Warren and Lou Whiteman. Guys, a little bit of a using a term from a prior host here. I think the news fairy really came in and gave us an extra little doubt for the show today because Meta Platforms has had its fair share of lawsuits out there. There was one back in New Mexico where courts ordered to pay almost a billion dollars in files. It's outstanding. But it looks like a lot of that is changing because it just agreed to a massive settlement with several states on a class action lawsuit.

0:47Tyler Crowe:And it looks like the total cost of this is going to be a lot less expensive than expected. Rachel, what were the details of this? Yeah, to really understand how Meta ended up here, we kind of have to look at what this was about. So you had a coalition of state attorneys general that sued Meta, and they accused the company of deliberately designing Facebook and Instagram to be addictive to children. And the lawsuits pointed to a wide range of features, infinite scrolling, algorithmic recommendations, constant push notifications. We saw recently that New Mexico had won a separate trial against Meta, and a federal judge in California was actually about to drag Zuckerberg himself to the witness stand.

1:26In fact, we saw, I believe it was just yesterday, the head of Instagram, Adam Masseri, had testified. So now Meta has agreed to a$17 billion settlement to resolve the claims of 47 states. Now, Meta is not going to be just cutting one check. They're actually paying a$12 billion baseline amount, and that's going to be distributed to the states to fund youth mental health addiction recovery programs. But the remaining billions, about$5 billion, actually only kicks in if Meta's top competitors, think TikTok, YouTube, of course, on my alphabet, Snap, also settle with the states and agree to face similar financial penalties.

2:06So that's a very interesting element of the settlement. Now, aside from the financial element of it, the settlement binds Meta to an independent auditor with data access to ensure that they are adhering to the terms of this agreement. It also, the settlement enforces sweeping permanent product changes across the U.S. that specifically protect different age brackets. For example, new age verification tools for children under 13, daily two-hour time limits for teenagers under 18, silencing of push notifications. So a lot of changes there for young users. The way a lot of the state's attorneys general are framing it is it's the largest state consumer protection settlement in history outside of the big tobacco deals of the 1990s.

2:54It does very much change the Internet for miners moving forward.

2:58Tyler Crowe:Yeah, I was trying to do the math before the show on where this landed in terms of like the biggest settlements in corporate history. It was it was we had big tobacco, obviously, you know, there was the Deepwater Horizon one was like 60 billion dollars. It's definitely in the top five, though. I think the biggest DOJ settlement was Enron, and that was only$7 billion. So definitely a massive settlement here, at least on a raw number here. At the same time I say that, though, we had$1 billion in losses to New Mexico with 48, 47 states in line to do similar class action lawsuits as well as state stuff here.

3:39Tyler Crowe:It seems like that loss, Lou, kind of influenced this decision to settle here because I think the losses they were looking at were expected way higher than$16,$17 billion or whatever the final number is going to be here.

3:52Lou Whiteman:Right. I guess the spin here is the attorneys general would say the change in conduct is so significant that it's worth it. The night mode, the no notifications during school, all of that. But on the surface, the monetary side of this is just kind of what's got to be a letdown. By my count, looking at the, let's say it was 52 parties, 48 states plus four territories. Break it down, that's about$340 million per state, assuming, as Rachel said, the full 17 comes in. New Mexico got almost a billion by comparison. So, yeah, definitely, this is a better monetary outcome for Meta than having to go through all of these one by one, and again, the time, too.

4:36Tyler Crowe:Yeah, one of the Bloomberg stories that came out before this settlement was announced this morning was some of Meta's lawyers had said that the losses here could be almost$1.4,$1.5 trillion, basically the entire market cap of the company, based on their kind of projections of, well, if this New Mexico case did almost a billion, this is what the rest could look like. So obviously, 16, 17, 18, whatever the number is, it's definitely a lot less. Now, there are still several cases outstanding. This is just the federal ones. So there's some state ones, there's some local ones. There still could be some more coming out of this.

5:16Tyler Crowe:I want to turn this to the investor side because, you know, big capital outlays for a company like Meta, I would have said five years ago, probably not a big deal because this is a business that has cash coming out of its ears. But now that they've got all of this capital spending requirements for AI infrastructure, doing a lot of off-balance sheet deals and stuff like that, does this in any way alter Meta's plans for capital spending and AI infrastructure ambitions at all?

5:45Lou Whiteman:Not for now, at least. The total outlay here is about 12 % of what Meta intends to spend on AI in 2026 alone. I doubt they'll write that check for, you know, all of this settlement in this year, too. So they have a lot of wiggle room. here. Look, this is less than they're going to spend on stock based compensation in 2026. Just put in perspective, the only way that this impacts spending is long term. If the settlement really does change human behavior and somehow make the magic money printing machine print significantly less money, I'll probably take the under on that. And I'm definitely not going to assume that.

6:20Lou Whiteman:But for now, this is a way for Meta to just get back to business as usual, which I think was the motivation of writing that big check. Yeah. No, I think that's absolutely correct. I mean, from a product perspective, I think there are some wins for users. From a financial perspective, this is, without equivocation, a win for Meta. I mean, even with the other cases still looming, this is not going to derail their CapEx plans. I don't think it's going to in any way touch their AI infrastructure ambitions. I mean, we actually saw Meta stock. I don't know where it is at the time we're recording it, but it ticked up right after the news broke because essentially this settlement has put a cap on the significant liability that it was potentially facing.

7:04And it's going to be paying out orders of magnitude less than what we had thought could be a possibility. When you consider that Meta pulled in hundreds of billions in revenue last year alone at payout like this, it's structured over time. it's quite literally a drop in the bucket for their balance sheet. And that's the reality for Meta.

7:22Tyler Crowe:I'm starting to come around to this idea. And it's hard to penalize a company as big as Meta when they have these massive coffers, these massive market caps where $16 billion sounds like a massive settlement, but we're talking about less than 1 % of their entire market cap here. It is a question we're actually going to get to in a lister question coming up. But before we do that, coming up after the break, we're going to dive into Intuit's earnings.

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9:42Tyler Crowe:Shares of tax and accounting software company in Twitter down about 3.5 % as we tape after the company reported earnings. I think before the market opened, shares were down almost 10%. I think some combination of earnings and slower growth forecasts being revised down. It wasn't exactly what the market was looking for. Lou, what did the numbers actually look like? Were they really that bad? I guess based on the market reaction, we've seen a lot worse this quarter.

10:08Lou Whiteman:You said it, though. It's been kind of the story of this earnings season. The numbers weren't bad relative to expectations, but the forecast was disappointing. They actually beat on revenue and earnings per share, but on guidance, they're lowering their growth targets for the year. Customers, according to them, are fleeing TurboTax due to the costs, and areas that are growing, like Credit Karma, are not growing fast enough to offset the losses there. So it's a looking forward reaction, not a reaction to what they actually posted.

10:36Tyler Crowe:Intuit is one of those companies that has gotten a little bit wrapped up in the SaaS-pocalypse. I know Intuit isn't necessarily a SaaS company, but basically anything that is software-related these days is doomed by AI because everyone's just going to apparently build all their own software and apparently have AI do all your taxes or whatever. Is that actually the case here, or is this maybe just like an easy excuse that management investors can use when looking at Intuit these days?

11:10Lou Whiteman:I'm picking B here. All right, this isn't about AI. AI is not doing anyone's taxes yet, maybe eventually, although I'm not sure I'm ready to give all that information to Grok. I don't know about you guys. And there aren't hundreds of thousands of businesses, small businesses, that are just switching over all of their accounting systems to Claude, okay? Intuit has always been run, or in recent years, has been run like it's a monopoly, like it's a utility. And utilities have terrible customer service. Why? Because deal with it. You can't help it. They have not listened to the market. They were kind of caught off sides here, I think.

11:45Lou Whiteman:In their commentary, the top reason customers leave TurboTax was price. They weren't listening to their customers. Add in, they've made a few questionable deals that haven't worked out. Accord business under pressure. This isn't AI. This is a case where management should look in the mirror and ask itself hard questions. Yeah, I tend to agree. I do think that this is a scenario where you have a series of bad business decisions catching up with the business. For many years, Intuit leveraged its power to really consistently and relentlessly raise prices on TurboTax. A lot of filers paying more and more each spring.

12:22We've even seen the CEO saying price is now the number one reason customers are abandoning TurboTax for cheaper DIY alternatives. So that's, you know, not a failure of technology. That's a business error. I think they got greedy, overplayed their hand, and I think they damaged their consumer goodwill. And that's why they're being forced to slash a lot of their prices and accept a slowdown in the hopes of winning back lost market share. And, you know, I agree, you know, people aren't feeding all their tax information into Claude. But it is the case that a lot of generative AI tools have made it very simple for these small startups to build cheaper, free, useful conversational tax prep tools that can handle a lot of these elements in minutes.

13:04And so I think what we're seeing is a lot of investors, Wall Street looking into its core business, that software moat that maybe we thought they had seems to be rapidly evaporating and somewhat becoming obsolete in a time where, you know, AI agents can be handling a lot of these small business accounting or helping build tools to do that for pennies on the dollar. So I think there are a lot of ways in which Intuit has made a series of bad decisions that have led it to this moment.

13:31Tyler Crowe:One last thing as we come out here, because they own a couple properties, obviously Credit Karma and Intuit, QuickBook, they seem to be like the big ones for them. But I actually wanted to focus on Credit Karma for a second, because it does seem like that is one of those sort of things where people check their credit scores when they need to, you know, finance something large, a car, a new project or a house or anything like that. Is there any possibility here where Intuit may also be suffering from this like housing spending slowdown that we're seeing here and that, you know, bringing back to probably a topic that I talk about way too much here is like housing could like an uplift in the housing market start to like reinvigorate at least one segment of this business here.

14:18Lou Whiteman:Maybe, but Credit Karma looked pretty strong relative to other parts of the business. MailChimp has been a disaster among acquisitions. They just, they never really figured out what to do with it. Now the answer is we overpaid, so we got to just start cutting. I'm sure the rising tide would lift the boat over at Credit Karma, but I don't think the answer is a better mortgage market because I don't think that's the part of the business that's really ailing.

14:43Tyler Crowe:It'll be something worth following, at least in the sense of like, you know, management excuses as to why things aren't going quite right versus, you know, making tangible changes to some of the points you guys made here. Coming up after the break, we're going to dip into the mailbag.

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17:01Tyler Crowe:of impersonal question related to stocks or something like that. Today's question come from Carolus Shimkus. I hope I pronounced that name right. If I didn't, I apologize. This is actually a question kind of related to what we were talking about with legal settlements and stuff like that. So the question is, hey guys, you've just talked about Uber's potential in autonomous food delivery, but they are faced with a possible$825 million fine in Europe for GDPR rules violations. Could this stop some of that progress? And how should investors look at these types of fines for hyperscalers who might be faced with something similar in the future?

17:40Tyler Crowe:We just had this long discussion about Meta at the top and their social media-related infractions with the law and settlements and stuff like that. So it does kind of bring all this together because we have these massive, massive companies seeing massive fines. Is it really going to slow down progress? We kind of said not really at Meta. What about Uber?

18:01Lou Whiteman:So fines are speed bumps, not road closed signs. And now this is a huge speed bump. I agree. It's a billion dollars or so, but I don't think this will impact their long-term ambitions. If you read the fine print on this one, it's kind of how they, maybe they used automation to discipline employees or to filter, or I'm sorry, not employees, drivers, so contractors. This might be a reminder of why Uber would like to see the autonomous happen. The bigger issue in delivery for Uber is the amount of competition that's out there and the issues trying to make autonomous a reality. I think, I mean, this is a very, very big annoyance for them.

18:42Lou Whiteman:I don't mean to whistle past a billion dollars, but this is not going to change their outlook. Yeah, I think Lou's right on that. I mean, so this is a 825 million euro fine. That's about 966 million dollars based on today's exchange rate. I mean, Uber just reported, you know, profits of over a billion dollars in recent quarters. So this is not a capital destroying event. And I think we've seen for many years now, tech giants will view these types of regulatory battles as an expensive but unavoidable cost of doing business. I mean, you can go back to the, you know, 562 million antitrust fine against Microsoft back in 2013.

19:20Meta's historic FTC settlement in 2019 didn't break their ad business. I think it's more about the fact that obviously there will be maybe some tightening of compliance protocols, but this GDPR penalty actually highlights, as Lou alluded to, the exact reason why Uber is pushing so hard into autonomous vehicle infrastructure, because the cause of this fine was that Uber was letting automated algorithms essentially suspend or permanently deactivate human drivers without any human oversight. And obviously that cuts off the workers' income instantly. And when your business model relies on managing millions of gig workers across the globe, as Uber does, you're often exposed to labor disputes, these types of lawsuits, privacy liabilities.

20:04So I think the thing for investors to watch, it's not what European regulators do. It's really whether Uber is able to scale their self-driving partnerships fast enough to move towards their hybrid autonomy goals on target. That's what I'm watching in the mid to long term for Uber.

20:21Tyler Crowe:And this isn't just specific to Uber. It's kind of thinking, again, about these very large companies, the idea of behavior change, because obviously these fines are supposed to be to change behavior at a lot of these companies. And again, when you have companies that are hundreds of billions of dollars or trillions of dollars, are these the type of things that are going to actually incent behavior change? Obviously, like we were saying, the monetary fine for Meta up at the top here on their settlement may not necessarily do it, but it seems like some of the enforced behavior changes of how they operate their business might actually be a little bit more of a solution here.

21:01Tyler Crowe:So it would be interesting to see if companies like Uber and others start to face similar things. How are penalties going to be put in place to actually incent change? Something we can definitely follow as investors as we come up here. But that's all the time we have for today. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only.