Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has outperformed the broader market over the past year, but recent developments have halted the company's run. Alphabet's second-quarter results, released on July 22, spooked investors, as its free cash flow turned negative due to significant investments in artificial intelligence (AI). Further, Alphabet is facing legal troubles.
There are thousands of lawsuits alleging that the company's social media platform, YouTube, causes addictive behavior and harms users, especially younger users (these lawsuits also target other social media leaders). A federal judge recently ruled that these lawsuits can move forward. So, this may be the beginning of a drawn-out legal battle for Alphabet.
Should investors avoid the stock due to these developments? Perhaps considering some major legal battles that large corporations have endured in the past will tell us something about the impact the ones Alphabet is facing could have on its business. This Rare Signal Is Flashing Again.
In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » The legal process is slow.
Lawsuits against major corporations can take years, sometimes even decades. Companies with large client bases and significant earnings and cash flows can absorb these costs in various ways. They may insure themselves against significant legal troubles while gradually recognizing expenses and losses.
Even a massive, multibillion-dollar settlement spread out over multiple years may not be too damaging to a well-established, financially sound company. Further, businesses can even pass some of those legal costs on to customers by raising prices slightly. In other words, companies can navigate significant legal challenges when they are financially strong and flexible enough, and still generate strong results while facing lawsuits.
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