Shares of Snap Inc. (NYSE: SNAP) tumbled nearly 8% on Wednesday, as investors weighed the impact of a new youth-safety lawsuit filed by Pennsylvania and a landmark settlement by Meta Platforms (NASDAQ: META) that could set a precedent for social media companies.
The stock fell 7.94% to $5.45 by mid-afternoon trading, with about 52 million shares changing hands—roughly 24% above its three-month average volume. The decline erased approximately $791 million in shareholder value, based on Snap's outstanding share count of 1.682 billion as of June 30.
Pennsylvania Lawsuit Targets Snapchat Features
The lawsuit, filed Tuesday in the Philadelphia Court of Common Pleas, accuses Snap of misleading users about Snapchat's age appropriateness and failing to warn about allegedly addictive features. The state specifically calls out disappearing messages, infinite scroll, autoplay, push notifications, Snapscore, and Snapstreaks, as well as features like Find Friends, Snap Map, My AI, and beauty lenses.
Pennsylvania Attorney General David Sunday is seeking injunctions, civil penalties, and other equitable relief, but the complaint does not specify a damages amount. This ambiguity leaves the potential for product-related remedies as a more immediate concern for valuation than a fixed financial penalty.
Meta Settlement Adds Pressure
Adding to investor anxiety, Meta Platforms agreed to pay up to $18 billion to settle claims from U.S. states regarding the impact of its platforms on young users. Although Snap was not a party to that agreement, the scale of the settlement provides a new benchmark for the financial and regulatory risks facing social media companies.
Meta's shares rose 1.86% to $580.65, while Pinterest (NYSE: PINS) slipped 1.06% to $23.41, indicating that the selloff was largely company-specific to Snap.
Financial Impact and Advertising Reliance
The concern is heightened by Snap's heavy reliance on advertising revenue, which accounted for $1.283 billion, or 80.2% of total revenue in the second quarter. Overall revenue grew 19% to $1.599 billion, but any regulatory restrictions on engagement could hurt ad sales, especially in North America where daily active users fell 7% to 92 million, despite a 23% increase in average revenue per user to $10.26.
Snap has argued that the lawsuit misrepresents its platform, pointing out that Snapchat opens to a camera rather than a feed and is designed for messaging among friends. The company emphasized its commitment to teen safety in a statement to Bloomberg Law.
Wall Street Cautious
Analysts remain cautious, with a consensus Hold rating and an average price target of $7.38, implying potential upside of about 35% from current levels. However, the wide range of targets—from $5 to $16—reflects significant uncertainty about the outcome of the legal proceedings.
Despite the negative sentiment, Snap's financial position has improved. Adjusted EBITDA rose to $250 million in the second quarter, up from $41 million a year earlier, and free cash flow climbed to $121 million. The company ended the quarter with approximately $2.66 billion in cash and marketable securities.
Outlook
Snap management projects third-quarter revenue between $1.70 billion and $1.74 billion and adjusted EBITDA between $300 million and $350 million. However, the legal overhang could weigh on shares until more clarity emerges regarding the scope of potential remedies.
Investors will be watching for any developments in the Pennsylvania case, as well as potential actions by other states, as the social media industry faces growing scrutiny over youth safety.
