Dolby Laboratories, Inc. (DLB), Zynga Inc (ZNGA): Three Companies You Should Avoid After Earnings

Note: This article has been amended to better reflect Zynga Inc (NASDAQ:ZNGA)’s liquidity position and management.

Earning season provides investors with the opportunity to gain insight in to not only how a company has performed recently but also whether the company is heading in the right direction. The companies I discuss below should be avoided, either because of a negative outlook or simply because the upside is limited.

Second quarter results were good, but not good enough

The company missed on calculated billings, which grew by 34% year-over-year; this was a drop from normalized first quarter billings growth of 37%. Total calculated billings of $109.6 million were below the expectation of $111 million. Investors need to take this data and consider the fact that the company has limited upside considering the company is trading at a higher valuation compared to their peers. The company has an estimated price-to-free-cash-flow ratio of 15.1 times compared to an industry mean of 8.3 times, implying that the company is “expensive.”

Investors should consider whether the quarterly results were good enough to justify a premium valuation and question whether the stock can continue outperforming the market.

I believe that the shares can see some limited downside to the mid $80s range as investors lock in profits. This is likely considering that shares are up around 40% year to date. I also believe that shares of the company may remain at these levels as NetSuite Inc (NYSE:N) has indicated that it cannot match its prior growth moving forward. Despite the fact that the company is still profitable, its upside can be limited and investors should be encouraged to seek other alternatives that offer a higher growth prospect.

Nothing has changed: same disappointing story

Zynga Inc (NASDAQ:ZNGA) reported a second quarter that beat on both the top and bottom lines. Shares were down 14% on Friday, however, as investors rushed to abandon ship following the announcement that the company will no longer pursue a gambling license in the US. The gambling license would have promised investors a lucrative new venue stream provided by a real-money online casino.