Why Facebook Stock Can Go Nuts This Year

Facebook (NASDAQ:FB) has multiple earnings drivers starting now. But the big hype monster is any positive news on Libra moving forward. Then I expect the stock to go nuts. And if not we have the core business, which is starting to improve again.

First let's review fundamentals.

If you've followed my work you know that I closely watch and predict earnings. I look for earnings inflections that can drive the stock price. Stocks are valued based on their future earnings potential. Facebook is showing signs of a reacceleration in earnings.

Revenues, gross margins and daily active users are showing signs of improvement.

For me gross margins are the biggest shift and driver to EPS and have shorter-term reasons that this can continue. My guess is that most are not focused on this core earnings driver. EPS drive stocks.

Here's the gross margins.

Facebook           A E
  2018 2018 2018 2019 2019 2019 2019
  Q2 Q3 Q4 Q1 Q2 Q3 Q4
    12028 12479        
Cost of revs 2214 2418 2796 2816 3307 3155 3211
Year over year 79.0% 67.0% 73.6% 46.1% 49.4% 30.5% 14.8%
Gross Profit 11017 11309 14118 12261 13579 14497 17613
Gross Margin 83.3% 82.4% 83.5% 81.3% 80.4% 82.1% 84.6%
bp change -3.5% -3.6% -4.1% -2.6% -2.9% -0.3% 1.1%
2yr -2.5% -3.5% -4.6% -4.2% -6.3% -3.9% -3.0%

Source: Elazar Advisors Models sourced from Facebook earnings reports

There's a few ways to look at this. First, "cost of revenues" year-over-year growth is slowing. 79% growth down to 46% down to 30% last quarter. Costs are slowing meaningfully. That should get gross margins to start moving up.

The main driver to cost of revenues is depreciation which is driven by capex.

Here's capex growth slowing. I'm setting up a picture for you that margins and earnings are about to pop.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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