Meta stock selloff continues, but a bigger risk looms

Shares of Meta Platforms extended their selloff on Friday, as mounting legal setbacks weighed on investor sentiment, but the recent decline also points to a deeper concern building beneath the surface.

While US court verdicts have triggered immediate losses, investors are increasingly focused on the broader implications for Meta’s business model and future risk profile.

The stock dropped following rulings in New Mexico and Los Angeles that found the company responsible for harm to teenage users.

The decisions included a $375 million fine, along with the potential for additional damages tied to mental health claims.

While the immediate financial impact of the individual cases is limited, investors are increasingly focused on the broader implications.

Legal experts have warned that these rulings could pave the way for litigation targeting platform design rather than user-generated content.

Such a shift could bypass existing legal protections and expose the company to a growing number of similar lawsuits already filed in US courts.

“There was much discussion…whether the ruling can be compared to those against Big Tobacco in the 90’s,” wrote J.P. Morgan analyst Doug Anmuth. “[A]n appeal lies ahead, along with many other cases going to trial. But the noise could keep Meta shares under pressure or range-bound in the near-term.”

The company is appealing the rulings, but the evolving legal landscape has added uncertainty to its outlook, contributing to the recent decline in its share price.

AI spending surge raises concerns over cash flow

Beyond legal risks, investor sentiment has also been weighed down by Meta’s aggressive spending on artificial intelligence infrastructure.

The company has committed substantial capital to expanding its data center footprint and advancing its AI capabilities.

Meta recently increased its planned investment in a data center in El Paso, Texas, to more than $10 billion, up from an earlier estimate of $1.5 billion.

This is part of a broader strategy that includes 31 planned data center projects across the United States.

“We are increasing our investment in El Paso to more than $10 billion and will now support more than 300 jobs at the data center once completed,” Meta said in a statement. “Our construction needs will also grow and we now anticipate that over 4,000 construction workers will be on-site at the peak of construction.”

The company has also agreed to fund seven natural gas power plants and related infrastructure in Louisiana to support another major data center project.

These investments come at a cost.

Meta has flagged up to $135 billion in capital expenditure this year, with free cash flow expected to fall sharply to $6.25 billion from $43.80 billion in 2025, according to FactSet data.

Unlike some peers, Meta lacks a cloud-computing business to offset these costs, leaving it reliant on its core operations to justify the spending.

Concerns have also emerged around its ability to compete in the rapidly evolving AI space, with reports suggesting delays in the release of its latest model.

“We continue to see Meta as range bound until a competitive new model is launched or more clarity [comes] around free cash flow,” wrote Oppenheimer analyst Jason Helfstein.

Investors weigh risks as stock trends lower

Meta shares dropped 3% on Friday. The stock has now fallen 12% in the last 5 trading sessions.

The company’s market position has also shifted, with Meta slipping to the eighth-largest US company by market capitalization, behind firms such as Broadcom and Tesla.

Investor caution is also reflected in portfolio moves.

Cathie Wood’s ARK Invest sold 3,578 Meta shares across three funds, worth about $2.1 million based on Wednesday's closing price.

The ARK Innovation ETF now holds around 105,000 Meta shares, representing roughly 1% of the fund’s weighting.

Despite these challenges, Meta continues to benefit from solid advertising performance, which supported its most recent earnings.

However, the combination of rising legal risks, heavy AI spending, and uncertainty around future innovation has kept investors on edge.

As the company navigates these headwinds, market participants are likely to remain focused on developments in ongoing legal cases, progress in AI initiatives, and the trajectory of its cash flow in the coming quarters.