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Apple Inc. (AAPL) and Facebook Inc (FB): Contrasting Fortunes?

Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) declared their third quarter and second quarter results in close succession. While Apple’s performance confirmed some of the Street’s long held skepticism, the story was quite different at Facebook, which posted some surprisingly good numbers!

Are Apple’s earnings in crisis?

A slightly more charitable view of Apple’s third quarter results is to highlight the company’s $35.3 billion revenues in the quarter being in the band of Apple Inc. (NASDAQ:AAPL) CFO Peter Oppenheimer’s guidance of $33.5 billion and $35.5 billion and the EPS of $7.47 being better than the $7.34 that bearish traders were expecting. However, others will point to the third quarter results of 2012, when profits of $8.8 billion were reported on revenues of $35 billion, for an EPS of $9.32. A 20% fall in EPS on a year-on-year basis and a fall in gross margin to 36.9% from 42.8% suggest that Apple’s clearly in need of the blockbuster products that have become the company’s calling card.

While the release of OS X Mavericks and iOS7 is expected soon, what about the mainstay iPhone and iPad? While there is good news on the iPhone front, where Apple Inc. (NASDAQ:AAPL) sold 31 million, up from 26 million in the third quarter of 2012, the iPad has taken a hit; only 14.6 million units were sold in the third quarter of 2013 compared to 17 million in the third quarter of 2012.

A mixed bag

What about China, where Apple Inc. (NASDAQ:AAPL) has staked a lot, committing to doubling the number of stores in that market? Some of the worst news in the third quarter came from this market — a 14% decline in revenue, reversing the trend of two back to back quarters of growth, and a 10% gap with market leader Samsung that has about 17% of the smartphone market. How much Apple is willing to discount its products for volume gains in China also remains unanswered, contributing to uncertainty.

This is why Tim Cook, CEO of Apple Inc. (NASDAQ:AAPL), is keen to highlight the successes on the iTunes, software, and services side of the business, a segment that showed a 25% revenue growth year-on-year, and accounted for 11.3% of the third quarter revenue. Apple also recently reported its 50 billionth app download from the App Store, and as the customer base for apps continues to grow, there could well be a fundamental shift in how Apple’s numbers get influenced.

Fourth quarter predictions

Apple Inc. (NASDAQ:AAPL)’s fourth quarter guidance is for revenue in the $34 billion-$37 billion band, which has some analysts predicting that new product launches can be expected in a September 2013 time frame. The iPhone 5S and a low cost version “iPhone Lite” are the top contenders for this slot.

Facebook rising

In June, Facebook Inc (NASDAQ:FB) stock was trading around $24, after a $38 IPO listing in May 2012. What a difference a month and the release of Facebook’s second quarter results have made!

Revenue grew by 53% on a year-on-year basis to $1.81 billion from $1.18 billion, beating analyst expectations of $1.62 billion comfortably. Net income was $333 million in the second quarter compared to a $157 million loss the same time last year. Even last quarter’s income of $219 million, which was a big jump over the fourth quarter 2012, was easily surpassed. EPS stood at $0.19 from $0.12 in the first quarter, beating the $0.14 figure that analysts were expecting.

So what explains yesterday’s problem child beating the most optimistic of Street expectations? In one word, mobile.

Upwardly mobile

Facebook Inc (NASDAQ:FB) reported 819 million mobile monthly active users — a 51% increase year-on-year and over the 751 million reported in the first quarter. The company translated this into increased mobile advertising revenue, which accounted for 41% of the total ad revenues ($1.6 billion), up from the first quarter when it was only 30%.

What’s made mobile advertising so lucrative for Facebook Inc (NASDAQ:FB)? For one, advertisers like the ability to insert their ads into Newsfeeds, and early results seem to indicate these are more effective than traditional display ads. Also, local small businesses seem to have realized that Facebook users are increasingly on the mobile and they better take advantage of the SoLoMo (Social-Local-Mobile) behavior.

Google’s cautionary tale

Facebook Inc (NASDAQ:FB) is still be dwarfed by Google Inc (NASDAQ:GOOG)’s approximately $9 billion mobile ad revenue. However, Google’s own problems were underlined in its poor third quarter results where it missed Street expectations on earnings and revenue. Analysts are worried about Google’s steadily falling cost-per-click numbers, which many are attributing to most of these clicks increasingly coming from mobile users where ad pricing across the board is lower than for the conventional web. With Facebook’s growth coming from mobile users, will it run into a similar problem?

Despite their contrasting fortunes, both Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) are sitting on lots of cash, still trading off their highs, and the underlying fundamentals look good. That’s a Buy in anyone’s book!

The article Apple and Facebook: Contrasting Fortunes? originally appeared on Fool.com and is written by Preetam Kaushik.

Preetam Kaushik has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. Preetam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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