Why Meta Platforms Stock Slumped on Wednesday

Shares of Meta Platforms (META -3.27%) slipped on Wednesday, falling as much as 3.4%. As of 1:30 p.m. ET, the stock was still down 3.2%.

The broader market’s downdraft no doubt helped propel that decline, but the key catalyst that sent the social media titan lower was a new federal lawsuit.

New legal troubles

Reports emerged late Tuesday that California’s attorney general  — along with the attorneys general of 33 other states and the District of Columbia — had filed a lawsuit in federal court against Meta. That suit alleges the company “designed and deployed harmful features on Instagram and Facebook that addict children and teens to their mental and physical detriment.” Eight other states that are not party to the federal lawsuit have filed related actions in their respective state courts.

The complaints further allege that Meta Platforms knowingly marketed its social media platforms to younger users, specifically those under the age of 13, even though targeting users of that age is barred by both Meta’s internal policies and federal law.

The federal lawsuit cites research that suggests younger users experience a variety of negative issues due to their interactions with social media, including depression, anxiety, and insomnia.

“Despite overwhelming internal research, independent expert analysis, and publicly available data that its Social Media Platforms harm young users, Meta still refuses to abandon its use of known harmful features … and downplay the impact of those features on young users’ mental and physical health,” the filing reads.

Meta responded by asserting that it has introduced a number of features to promote well-being in teens, while also increasing parental controls.

Has Meta’s stock price gotten ahead of itself?

Beyond the company’s new legal troubles, investors are focused on Meta’s third-quarter financial report, which will be released after the market close Wednesday. Year to date, Meta Platforms stock is still up by more than 150%, with investors looking toward the potential impact of artificial intelligence (AI) on its platforms, as well as the rebound in the digital advertising market. Investors will be keen to see if its Q3 results support that soaring stock price.

This isn’t the first time Meta Platforms has faced legal trouble, and it’s certainly something investors should keep an eye on. That said, these suits will likely take years to work their way through the legal process. For now, investors should focus on Meta’s business and financial performance.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.

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