Sometimes your fastest selling product makes a miss and the laggard takes its place. This was the case with Apple Inc. (NASDAQ:AAPL)’s latest earnings report, as iPhone sales were 31.8 million (31.2 million plus the 600,000 from previous inventory), which beat estimates for 27 million iPhone’s to be sold in the quarter. That presented a 20% increase over last year.
Regardless if it was a decrease or a slight growth it still missed everyone’s expectations for strong growth. The tablet market is expected to grow by 58.7% (according to IDC) in 2013, yet the iPad lacked that growth. While a strong iPhone showing easily compensated for the miss, going forward Apple Inc. (NASDAQ:AAPL) needs another big selling device when the US market reaches full saturation.
This Fall
It is expected that Apple will unveil an iPhone 6 this Fall, with a lot of speculation around whether or not Apple Inc. (NASDAQ:AAPL) will release an iPhone Lite. An iPhone Lite would enable Apple to push into emerging markets, like Google Inc (NASDAQ:GOOG) has been, with a lower price point. Android has been snatching up market share as its phones sell for a third of what the iPhone costs in emerging markets.
Kantar puts Android’s market share in China at around 71.5%, surpassing Apple’s 23.6%. If Apple Inc. (NASDAQ:AAPL) signed a deal with China Mobile and offered a lower cost iPhone, that would be huge. The growth runway would be enormous, with China Mobile rapidly converting its 750 million customers to 3G. As of now China Mobile has 129.4 million 3G customers and China as a whole has 309.5 million.
A cheaper iPhone would enable Apple to cater to significantly more Chinese consumers and would be a major buy signal if it announces one in the future. Apple Inc. (NASDAQ:AAPL) saw a 14% revenue drop in China this quarter and a 43% drop from the previous quarter. If Apple can reverse this then it can start growing again, it will see its PE rise from 10.5 to around 15.
When Apple Inc. (NASDAQ:AAPL) announces or gets close to announcing the new iPhone is when it would be a great time to buy, but I would become very bullish on Apple if it released an iPhone Lite.
Booking a smaller loss
Investors who got into Facebook Inc (NASDAQ:FB) during the IPO had losses around 50%, until its latest earnings. Facebook rallied 30% the day after it posted a beat and showed investors that it could effectively get into mobile.
Facebook Inc (NASDAQ:FB) posted revenue of $1.81 billion, which was up 53% year over year and beat estimates for $1.62 billion. On the earnings side, Facebook posted an EPS of $0.19, beating estimates for $0.14 and up from $0.12 a year earlier.
In the first quarter, mobile revenue made up 30% of revenue but that jumped up to 41% in the second quarter. Facebook Inc (NASDAQ:FB) now has 819 million monthly mobile active users, which was up 51% year over year.
This led to a variety of analyst upgrades and sentiment on the stock completely changed. While Facebook still sports a very high PE (trailing twelve months) of 156, its forward PE is 36. If Facebook Inc (NASDAQ:FB) can keep moving into mobile maybe one day it will have a realistic PE.
Investing in Facebook Inc (NASDAQ:FB) is like investing in Amazon, it trades more on sentiment and future potential than fundamental valuation. While its hard to put a “fair value” on this stock I could see it going to $40 a share by the end of 2013 as investors switch from a bearish sentiment to a bullish one.
No more gambling?
I had high hopes for Zynga Inc (NASDAQ:ZNGA)’s foray into the gambling market in the US. Management in Zynga’s latest quarter said they were no longer going to do so. I think this was a terribly foolish mistake and is why I am no longer bullish on Zynga. Had Zynga Inc (NASDAQ:ZNGA) gotten into this market it could have added billions to its $1 billion in annual revenue.
Zynga saw daily active users fall 45% year over year and monthly active users was down 39%. The number of paid players dropped 53%, which was only slightly mitigated by those users paying 14% more on average.
Zynga Inc (NASDAQ:ZNGA) posted revenue of $230.74 million, which did beat estimates by a fair margin, but was down big from last year’s $332.49 million. While Zynga’s loss did narrow to $15.8 million from $22.8 million, the huge drop in revenue is very worrying. With revenue decreasing, there is no reason to own shares of Zynga Inc (NASDAQ:ZNGA) and its valuation will plummet.
I don’t see where Zynga Inc (NASDAQ:ZNGA) is going to be able to find the kind of growth to make up for the drop in games like Farmville. Maybe it will be able to push into mobile, but not before this stock drops lower. Bearish on Zynga.
Final thoughts
There have been some surprises this earnings season, from Apple Inc. (NASDAQ:AAPL) selling significantly more iPhone’s than expected to Facebook Inc (NASDAQ:FB) almost reaching its IPO price to Zynga Inc (NASDAQ:ZNGA) making a horrible mistake. I expect, going forward, Apple will start to see excitement build around its Fall product launches, Facebook Inc (NASDAQ:FB) will see analysts and investors become bullish again, and Zynga will see its stock price fall below $3.
The article Profiting From Earnings Surprises originally appeared on Fool.com and is written by Callum Turcan.
Callum Turcan owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB). Callum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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