GOOGL & META Lawsuit "Watershed Moment" for Social Media?

0:00We're back in Morning Trade Live, let's focus on social media stocks. So here's where the biggest names in that space are trading this morning after a landmark verdict in social media addiction case in LA Court. Mali will have more on that story in just a second. But these stocks are under pressure today, met at down 4%, read it down 4 and a half, snapped down 1.3 and alphabet is down 1.2 off the back of all of this. So we're seeing some heavy selling pressure for some of our social media stocks this morning off the back of this. Let's stick into the details here. Mali Kayden is joining us today, very good morning to you Mali, obviously you and I were talking about this on our show yesterday and obviously there's been a lot of comparisons drawn to Big Tobacco over the years as well around addiction. Just talk us through what we know about this case of what's been the fall hour and some of the response. Have any of the sort of sell sign analysts weighed in on this at all? Good morning Sam. Yet we're not getting a lot of commentary yet from this sell side. We are getting a lot of commentary on social, a lot of commentary from the legal community. So let's break down exactly what this watershed moment, what it is first off and then what

1:04it could potentially mean for some of these big tech names and these social media companies. California jury delivered a landmark verdict against meta and alphabet's YouTube finding that the platform's design features now specifically what they called the addictive nature are legally responsible for the mental distress that it caused a young user. The jury awarded the now 20 year old defendant who went by Kaley or KGM in all of the proceedings $3 million in compensatory damages. They concluded that features like infinite scroll, auto play and algorithmic recommendations are what they likened to digital casinos or cigarettes for minors. Jurors also recommended an additional $3 million in punitive damages after deciding that the company is acted with malice, oppression or fraud in harming children with their platforms. Now the judge has final say over what those exact damages will be on a punitive basis, but that was the recommendation from the jury that the full award be $6 million. Of whatever that final tally is, meta is responsible for 70% of that cost, YouTube responsible

2:06for the remainder. In the original suit, TikTok and Snap, which is Snapchat's parent company, were both named as well, but they settled with the plaintiff out of court before the trial began. So we really did have the big four social media companies tied in here. Now, $3 to $6 million doesn't sound like that big of a deal. It's a drop in a bucket for these trillion dollar companies. However, the legal precedent set here is what's at play. This could be potentially seismic. By focusing on what's called product design, as opposed to the content posted on the sites themselves, plaintiffs, this plaintiff particularly, has successfully bypassed the protection that these companies have been used. It's called Section 230 of the Federal Communications Destecency Act of 1996. That's why it's being likened to Big Tobacco. Big Tobacco also used this same shield, and then in the 90s, it was removed from their protections. So that's why we're likening it to this. But the real issue here is how much this is going to come into play with all of these other lawsuits that have been filed against social media companies as we now have a legal precedent saying they are responsible for the mental health of the users.

3:11Now Google's saying that it will appeal. It believes that it is not understanding you to its structure. It's responsibly built streaming platform. It says not a social media company, so it shouldn't be included at all in the argument. Whether that comes to be true or not in court, we don't know, but they plan to appeal metas as it's exploring all of its options will likely appeal as well. But there are more than 2,000 similar cases in the pipeline, SAM right now, and a federal trial scheduled for the summer. So the timing of this may force the industry as a whole to recalibrate how it is creating these platforms and how it is disclosing how you use them and what the potential harms could be. I mean, it's so important. I mean, you and I both have kids. We know how important screen time is or a lack of or a reducing that, but they've called a digital dementia and brain rot, you know, with people being sort of addicted to just being online. I know that there's been a lot of talk about that and growing concerns. So yeah, fascinating. You wonder how much of it, as you say, is really priced into some of these big stocks as well.

4:11Molly, thanks so much for getting us across the details. So let's trade alphabet now with Joe Tegay, portfolio manager at the Rational Equity Armour Fund. Joe, fascinating story. I don't know how much of it has to do with the price action today, just obviously given some of the rotation in the market, the headlines we're dealing with, but how would you approach an example trade for Google? Yeah, it's a stock that's had a lot of other issues going against it recently, just a general macro trend is against it recently. Definitely optimistic long term for Google and all these other companies. Hopefully this could be a change for the better for them too. Hopefully we can get a handle on this and as we move into this high world, be more responsible about it. So I'm optimistic this can all be for the best and I'm very bullish on Google for the long term. I say that understanding that the short-term trend is definitely negative and I'm concerned about more downward pressure. Google is a name, alphabet is a name that of course we own in my fund, the Rational Equity

5:15Armour Fund. So very bullish long term, obviously, but immediately downside that could be impacted just based on world events, obviously if I was to initiate a new position as an example trade, be looking at selling a cash secured put, just looking at some downside, 265 could be an area where we could find some support here in Google. This is for April or $3, so it allows me to collect $3, just be patient, sit on the sidelines and wait and figure out what's going to happen over the next month. Yeah, and obviously the interesting story we're focused on with Google at the moment is around TurboQuant, which seems to have sort of knocked the memory stocks off their skis a bit and we're seeing some really heavy rotation in this market this morning under the surface when you take a look at the semi-v software spread as I mentioned, I mean that sort of back and forth continues, you've got software's actually shining while chips are under pressure, obviously we know the story well up, stocks down, it's pretty simple

6:16Joe, but just walk us through any of the sort of dynamics you're seeing beneath the surface that stand out to you right now. Well, I mean, else that specifically there are a company that is spending a ton of money we're talking about, hundreds of billions of dollars on their future, so I'm actually optimistic about that. I think they're spending that in the right spot, they've proven to have done that in the past. They're not just sitting back and resting on their search saying this is going to lead us forward. We got a great search product. We don't need to do anything else. They're innovating. They're out there. They're getting ahead of the game in the market, just looking for just new areas of growth, new areas of technology, things that we aren't really thinking about right now. Google is already producing, so that's where it's really exciting for me for this company. It's broadly speaking, yeah. This market has been a lot of rotation back and forth up and down all year long. We've seen maybe a more negative days than down days. We're down about 4%, maybe right now in the S&P 500 on the year to date. It feels really bad, but remember last year we were actually down 10% at this point in

7:18the year. So it could be a lot worse. I think that rotation is keeping us together here as we're kind of shifting money back and forth. I'm hopeful, obviously we can pull through this, but it can get worse before it gets better. Right, yeah, one of my guests earlier this week described it as patchwork. And that seems to be working right now. You just wonder how long it can hold up for as far as that kind of dynamic in this market and this environment. Joe, really appreciate it. Thanks so much for getting us across Google Alphabet for us this morning. Joe T.Gay there, portfolio manager at the Rational Equity Armour Fund.