$META's $18B Settlement Explained: Nothing Burger or Real Risk?

0:00 Last week we talked about the Meta lawsuit and it's a good thing we talked about it last week because it it has been settled for $18 billion. So and this was against several states. >> In addition to the settlement amount, Meta has also agreed to make some changes to the experience for their teenage users. So, some of those changes, because there was a list of them, but some of them are setting a default 2-hour daily time limit for users under 18. All these defaults can be changed by the parents, by the way.

0:41 it will block apps for young users between midnight to 6:00 a.m. Again, by default, there will be a notification displayed on screen after you've been using one of their products for more than 15 minutes. just letting you know, maybe you should take a break. I thought this was an interesting one. There will be no operating system level notifications during school hours except for direct messages.

1:15 so it's not even though who's using their phone in school? No, you're not allowed to do that anyway. >> Oh, trust me. >> Yeah. and it and then it will make these defaults even more restrictive if their competitors agree to do the same. So, if YouTube and Tik Tok come out and say, "We'll actually do instead of till 6 a.m., we'll do until 7 a.m." That they'll they'll push it even farther. of the $18 billion, by the way, the the actual dollar set settlement, 70% of it will be paid over the next 10 years. So, this is not a payment they're making tomorrow. And 30% of that settlement is again tied to if YouTube and Tik Tok agree to similar terms. So, they might not even need to pay the full 18 billion dollars. so that's the initial spark notes of it all. What are your thoughts?

2:18 >> Okay, so you know, we talked about this last week and I speculated that this might the $1.4 trillion lawsuit that was like the headlines everywhere. I'm sure all of those companies are going to say $1.4 trillion lawsuit was settled for $18 billion. So I speculated that it it might cost Meta tens of billions. And it turns out they did a $18 billion settlement over 10 years. So roughly $2 billion a year. So I put together this little diagram of or a table of the last four quarters of Meta's profits from their family of apps. So roughly speaking, they've had $ 106 billion of profits from their family of apps in the last one year, right? And the reason they only have $87 billion of profits from operations from those apps is because they also lost $19 billion from their reality labs for the over the past year.

3:20 So, you know, if you look at the amount of profits that these apps are generating for Meta, 106 billion, and then you you extrapolate 2% of or two billion dollars roughly a year over the next 10 years, that's a 2% hit on their profitability. Basically, a 2% hit on the settlement. 2% is like what how much credit cards charge. In fact, they they charge more than 2% for credit card fees, right? like this is a nothing burger exactly like what we were what we were predicting. So from a financial standpoint this is a nothing burger. So then the next question becomes oh but what about the restrictions? Are the restrictions going to cause Meta not to be able to have the type of revenues and profits that it has had historically. and this is sort of where I think a lot of people are speculating incorrectly. First of all, the mo most of this these restrictions are apply to users that are younger than 18 years old. So that's a very small portion of the overall users that Meta has. So that's one aspect of it that I think people are underestimating. You know, 18 and under probably represents a less than 20% of their user base, right? So if 20% of their that's the maximum potential impact is on 20% of revenue, but that happens to be the cohort of users that is probably least susceptible to ads in general. Meaning they're not the ones that generate purchases from the ads that Met that Meta is running on Instagram. And you know, if they're running an ad for some widget that you end up buying, it's probably not a teenager that's buying that widget. is probably an adult. So most of their ad revenue is probably coming from the adults. So again, if the ad revenue that is coming from that cohort of users is is even smaller than 20%, it's likely even less smaller than 10% then the maximum amount of revenue that can that can be affected is that 10%. Out of a you know collection of over a hundred billion dollars. and then they're growing the hundred billion dollar number by the way at roughly 28% per year historically. So even if that slows it down because of all of these additional restrictions which is going to restrict the amount of time. So if you work backwards on this whole thing, you come to the conclusion that you know maybe instead of growing 28% they're going to grow only 20% and in the next year they're going to you know only grow their profits from 100 billion to 120 billion.

6:00 Whoops-ded you know. So, that is not at all like we we're just now seeing that it should have never been a concern. I wasn't concerned about it. I'm still not concerned about it. I continue to think that Meta is extremely undervalued. Obviously, just my opinion, not investment advice. And I think that the lawsuits are likely to be continue to settle in this fashion where this was the big one and then everything else is sort of chump change in comparison in my opinion. So I see this as an extremely positive thing for Meta going forward.

6:39 So I also ran the numbers slightly different numbers similar framing where this settlement the $18 billion is roughly 1.3% of their market cap so not profits but market cap and Meta was up today very close to 1.3%. so and by the way I would have expected them to shoot up more and they did initially and then it went back down. they shot up to around $600 a share and then went back down. but regardless, the the stock market basically paid for this $18 billion. so it I agree it was a complete nothing burger, which was really the conclusion of our talk yesterday is that was the most likely outcome.

7:30 >> or yeah, did I say yesterday? Last week. Time time flies. but but yeah, I I completely agree. Let's move on. >> What's interesting about it just just to sort of like one one other point on Meta, Meta stock has basically got gotten hit from the 600s down to the 500. So like it has lost roughly 20% of its value in the past few weeks over the o over this specific issue. and now we're seeing that this issue is probably not going to affect them in any significant way long term. And by the way, all of these effects are only on their existing products and has nothing to do with any of their AI or AR VR investments that are likely to shape their future. So AI products that they're going to introduce that they're now introducing products for developers similar to Gro and claude and chat GPT where you know that developers can use their products to build applications they're introducing products agents for businesses to be able to sort of like handle their support load and all kinds of business aspects do their advertising. I mean, there's like lots of new AI related product opportunities for Meta and now all of a sudden the stock is 20% cheaper. Again, this is like another reason where like I want I want more meta. I want more cash to have opportunities. I might be adding more meta even now. especially now that this lawsuit is settled. So, it's it's exciting from from my my perspective. If you enjoyed this clip, consider subscribing to the Buy Hold Rant podcast on YouTube, Apple Podcasts, or Spotify. New episodes are released every Wednesday, and you can watch them live on YouTube.