Meta is undervalued and a strong buy due to reduced legal overhang from the $18B settlement, growing AI/WhatsApp revenue, and low ~18.6 forward P/E.

In today's video, we are going to be discussing Meta's large settlement that it just had, what it means for the business and the share price, and also why the stock hasn't responded as well as many people thought it would, including myself.

So first off, let's discuss the changes that Meta needs to make to its platforms. And all of these changes are specifically for minors, which are people under the age of 18 in the United States.

The first one is a default 2-hour daily limit across its apps that teens can only disable with parent permission. A night mode from midnight to 6:00 a.m., which blocks feed, stories, reels, and the explore feature.

A school mode, which mutes notifications from 8:00 a.m. to 3:00 p.m. Continuous use prompts that warn the user every 15 minutes. Teens will also have a non-algorithmic feed as the default.

Teens will be able to turn off autoplay. Teens will also have likes hidden by default. There will be stronger age assurance and detection technology. And then lastly, there will be an annual independent auditor review to make sure that Meta is playing by these rules and that they are all actually being enforced.

Meta settled for $12.7 billion, which goes directly to the participating states over the next decade. Then there is an additional $5.3 billion that is being withheld and will only be released if YouTube and TikTok each implement 1-hour daily limits, night mode, age assurances, and agree to pay 30% of this total fee.

If TikTok and YouTube both agree to these terms, then the total will be $18 billion paid over a decade, which equals $1.8 billion per year with 12.7 billion of that being actually confirmed.

Meta also announced that it will post a $10 billion legal charge against its earnings in the third quarter, but guidance remains largely unchanged.

This specifically removes that large $1.4 trillion scary headline risk, and that has now been reduced to $18 billion in settlement fees over the next decade, which is obviously a massive win for Meta.

The remedies are also all for minors, which are not Meta's core business or revenue generator. So this is very bullish for Meta and does remove a large amount of the legal overhang.

However, there are still legal overhangs that exist. The first one is that individual personal injuries are still on the table. This is the over 2,400 consolidated federal suits from families and teens. This settlement doesn't touch this.

For example, the $6 million KGM settlement came from this pool. If the KGM verdict is repeated across all 2,400 of these remaining cases, then Meta's total fine could be $14.4 billion.

So, Meta could still have tens of billions of dollars of legal risk that it needs to deal with.

Then, there are still the school districts and local governments that are still suing Meta, and that is not dealt with, either. But again, that large $1.4 trillion legal risk has officially been closed.

So, starting from the top, $18 billion over a decade is non-material to Meta's business and thesis. Meta's business has done a hundred and thirty billion dollars in trailing twelve months operating cash flow, so it can more than handle these payments.

For example, this is only 1.4% of Meta's total annual operating cash flow at this time right now.

And over the next ten years, Meta's operating cash flows should continue to grow significantly, so this $1.8 billion annual settlement fee is going to become less and less relevant over time.

I also don't believe that the changes for teens are going to impact the long-term adult usage, and I believe that eventually they're going to become adults and continue using Meta's platform.

The scary $1.4 trillion headline risk is also gone, and the settlement is only a fraction of that, and you can really see how the headlines were just trying to scare people.

However, there are still more legal risks that remain, but none of them are going to be material to Meta's business over the long term, in my opinion. I'm pretty surprised that the stock isn't up more after this news, as it's removed an overhanging potentially large risk from the business.

Well, I have bought more shares, and I have continued to increase my Meta position quite significantly while all of this drama has been happening, and the stock was under $600.

In fact, it still is under $600, and Meta has become one of the larger positions in my portfolio during all of this drama. The first one is that Meta new Spark, which is its large language model, has been moving up the frontier rankings, while keeping its cost to operate extremely low.

For example, in this chart right here, we can see that Meta Mu Spark 1.2 is now behind a Chat GPT 5.6, while also being less than 1/10 of the cost to operate.

I believe that it's very bullish for Meta to have one of its own frontier models that is also significantly cheaper to operate.

I think that this is going to unlock a lot of efficiencies for the business and allow it to continue accelerating its advertising business as well. This next screenshot came out recently, it shows that in certain benchmarks, Meta Mu Spark is actually better than Chat GPT and is right behind Claude Opus 5.

Meta is also shipping new updates and models faster than OpenAI and Anthropic recently and is about to announce its new watermelon models. These watermelon models are being teased to be on par with Anthropic's Fable and Mythos models, which would put Meta's models right at the front of the frontier as well.

I believe that this is continuing to show that Meta's capex and investments in AI are starting to really pay off and I believe that these models are going to start producing more revenue for the business over time as well.

Moving on, I want to talk about another potential revenue generator for Meta over the longer term. And this one is Meta creating its own AI cloud and selling its excess compute.

This chart on your screen right now shows that by 2030, it's estimated that Meta could have 5 gigawatts of excess compute capacity to sell.

And with the world being so compute constrained right now, this is like Meta sitting on a ton of future gold and revenue potential. For example, currently, CoreWeave, NBIS and Iron get about 9.5 million dollars in annual revenue per megawatt of compute capacity.

So, if Meta has 5 gigawatts of excess compute by 2030, then the revenue potential for the business is 50 billion dollars per year.

This would be a brand new revenue stream that's equal to about 25% of Meta's current business. It would also be a cloud business that was as large as Google's in 2025. So, this is a brand new huge revenue optionality that Meta could really stand up at any time if it is not actually going to be using that additional 5 gigawatts that it is building.

Now, obviously, this isn't a guaranteed brand new revenue stream for the business, but Mark Zuckerberg has made it clear that it is an option for them if they want to monetize this compute capacity or if they are not using it internally.

It's kind of like the backup plan for the business, and having a $50 billion per year revenue potential backup plan, I think is a pretty good, you know, bad option or bad outcome here.

All right, now the last thing that I want to talk about quickly is Meta's other revenue, because this is something that I didn't discuss in my Meta's earnings video, but I think that it is pretty important, because Meta's other revenue is starting to grow very quickly, and it is scaling to be quite large.

For example, in the most recent quarter, Meta did over $1 billion in other revenue, and it grew by 73% year-over-year. Now, this revenue is almost entirely made up of WhatsApp revenue, which comes from the WhatsApp business platform.

This is the platform that businesses use and pay Meta for on a per conversation basis. And in Q4 of 2025, it was announced that this business was doing a $2 billion in annualized revenue, and it is now doing about $1 billion per quarter.

So, it seems like this business is accelerating, and on an annualized basis actually has more than doubled over the past couple of quarters. So, WhatsApp seems to be scaling and growing extremely well, and it seems like it's also just getting started and could be a large revenue generator for the business over the longer term.

Now, why I want to point this all out is because Meta's forward price-to-earnings ratio is still sitting around 18.6. So, this business is still trading for under a 20 forward price to earnings ratio, despite it being one of the highest quality businesses in the world, in my opinion, still growing well over 20% and has a ton of future optionality to continue growing the business and diversifying the business over the longer term.

In other words, I think that at an under 20 forward price to earnings ratio, I am getting a discount on Meta's existing business, and I am not paying for a significant amount of future growth and future revenue and cash flow optionality, that I believe is also being created right in front of us.

So, to me, I continue to believe that Meta is one of the best buys in the market today, and I have been consistently and aggressively been building out my position again under $600 per share, and Meta has become one of the largest positions in my portfolio in this price range.

I simply believe that a large amount of the legal overhang has completely disappeared. The business is continuing to grow. Its AI investments are continuing to pay off. Its models are getting to the frontier, and I'm not even paying for all of that optionality today.

So, I believe that the stock is still very undervalued and should produce some great returns going forward from here.