Shares in Meta Platforms (NASDAQ:META) went from $653 to $572 in March. That’s a 12.5% decline.
As a result, the stock is trading at a forward price-to-earnings (P/E) ratio of 15. That’s unusually low – but is it an opportunity or a trap?
Why is the stock falling?
There are a few things weighing on the Meta share price right now. But the most significant might be a pair of court rulings against the firm.
One states that the firm knowingly misled parents about the safety of its social media apps. That’s a potentially huge issue.
The case cost Meta around $381m, which isn’t a lot by itself. But the number of similar cases means this could rise sharply.
Another ruling states that the firm has designed addictive products that caused harm to young people. That’s another big concern.
The risk is that Meta might have to make substantial changes to its social media apps. And this could reduce its appeal to advertisers.
The legal issues aren’t the only reasons the stock fell 12.5% in March. But I think they’re the biggest threat in the equation going forward.
A buying opportunity?
Historically, legal challenges have presented investors with the chance to buy stocks like Meta. That might be concerning in some ways, but it’s true.
Most recently, it’s been true of Alphabet. The company was found guilty last year of illegally maintaining a monopoly.
Despite this, the firm escaped serious structural damage. And the share price is up 65% in the last 12 months as a result.
Meta also has its own history. The most obvious example is the Cambridge Analytica issues around privacy from 2019.
The company settled the cases (without admitting guilt) and the stock fell 39% as a result. But it’s now 320% off its lows.
There’s no denying that past legal issues have presented chances to be greedy when others are fearful. But investors need to tread carefully.
Risks and rewards
Buying shares in a company that’s facing legal troubles is always risky. And there’s a lot of uncertainty around Meta’s position.
It’s easy and natural to dismiss the potential risk as something that won’t happen. Especially when the consequences could be huge.
Alphabet last year is a good example. The company avoided the worst-case outcome, but I don’t think the market really took the threat seriously.
From what I saw, a lot of investors dismissed the possibility without having much reason for doing so. And that’s incredibly dangerous.
Good investors don’t do this. They think carefully about the potential threats and work out how significant they might be.
With Meta, that’s exceptionally difficult to do at the moment. But that might just mean the falling share price isn’t a buying opportunity.
The rules of investing
Investors looking to be greedy when others are fearful always need to ask one question: what do they know that others don’t?
With Meta, they need an insight into why the likely outcome of the legal issues is more positive than the market thinks. And that needs to be an informed view.
If I’m honest with myself, I don’t have this, so I’m not buying the stock. But there are plenty of other names I’m more positive about.
