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Wednesday, April 25, 2018

Facebook: Great Earnings Results Drive Stock Break Out

Facebook beat Street estimates by about $.32 putting to bed all the privacy hype fears. Revenues didn't slow they accelerated. We have continued upside for the rest of this year as we'll review.

Higher Expenses

Facebook's continuing to try to keep earnings expectations low by raising the low end of their 2018 expense growth from 45%-60% to 50%-60%. We previously wrote we thought there was upward bias to expenses. We'd point out though that the last two quarters' expense growth wasn't able to meet those targets.  Since they announced the 45-60% number back in Q3 they have yet to achieve it.

We think they announced a big expense number and upped it on Wednesday's earnings call to appease the government that Facebook's doing something about all the privacy and safety concerns.

But Higher Revenues And Leverage

That said, we don't think they can meet those targets making for very nice earnings leverage.  We're using their 50+% expense growth and we still get big upside versus the Street for the rest of this year.

When you do the math the higher revenue growth offsets the higher expenses since Faceboook is a very high margin business. I think that's what people forget. They listen to the hype but don't work through the math. The math gives you big EPS upside.

The Chart


FB stock chart
Click to enlarge
If the stock price holds the after market gains of 7% we'll be nicely above a key support/resistance level on the chart that we pointed out recently.

You can see the line we drew saw key action holding or breaking Facebook stock over the last year.

Breaking above that key level on strong volume would be a technically bullish sign inviting back many shaken-out shareholders.

Conclusion

With as much skepticism yet such an amazing business model with big EPS upside we stayed bullish. We previously wrote that Mark Zuckerberg himself hinted to strong earnings results to-come during his Congressional visit by saying key business metrics did not materially change.

We maintain a $400 target price so big upside from here.

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