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Why Facebook Stock Soared After Earnings Report

Facebook stock (Nasdaq: FB) was up almost 10% in the first 30 minutes of after-hours trading today (Tuesday) after the release of its third-quarter earnings report, its second as a public company.

Releasing earnings after market close, the social network leader posted earnings per share of 12 cents, on revenue of $1.26 billion, or 32% higher than the year-ago quarter.

While Facebook did not provide an outlook following its uninspiring second quarter release, analysts were looking for 11 cents per share on revenue of $1.2 billion, according to data from Thomas Reuters.

In addition to the earnings beat, the following highlights helped Facebook stock soar after the earnings release:

  • Mobile users increased 61% year-over-year
  • Monthly active users were up 26% year-over-year
  • Daily active users rose 28% year-over-year

CEO Mark Zuckerberg addressed the mobile activity in a statement today.

"As proud as I am that a billion people use Facebook each month, I'm also really happy that over 600 million people now share and connect on Facebook every month using mobile devices," said Zuckerberg. "People who use our mobile products are more engaged, and we believe we can increase engagement even further as we continue to introduce new products and improve our platform. At the same time, we are deeply integrating monetization into our product teams in order to build a stronger, more valuable company."

But this positive vibe doesn't mean Facebook's earnings problems are solved.

Biggest Concerns Facing Facebook Stock

Before giddiness sets in, deeper numbers reveal Facebook stock pessimists still prevail.

According to data from Schaffer Research, puts continue to outnumber calls in near front month contracts, and short interest still represents a lofty 6% of Facebook's available float.

Facebook also has to contend with the following major concerns.

  • Mobile Woes — Facebook has been struggling to monetize its mobile user base and increase

    mobile ad revenue. Late to the game in this arena, the company is scrambling to play catch-up.

    Half of Facebook's one billion users sign on to the site using mobile devices at least once a month, and a staggering 102 million users exclusively access the site via Facebook's mobile app.

    At issue is that fact that mobile users just don't generate as much advertising as desktop users. A big challenge in mobile is sizing the ads (which Facebook calls "sponsored stories") on smaller screens without overwhelming and thus irritating users.

    The transition to mobile is a timely process but Facebook is making headway. Ad revenue from mobile accounted for 14% in the latest quarter compared to zero in the prior quarter.

    In 2011, 85% of Facebook's total revenues came from advertising. With ad sales waning in 2012, $1.09 billion in the third quarter down 36% from the same quarter, reflecting the dramatic shift to mobile, its revenue stream is suffering.

  • Looming Lockup Expirations Still a Drag on Shares — Continuing to weigh on Facebook
    stock is the expiration of more lockups allowing insiders to cash in their stock.

    Regardless of what Facebook does or says, scores of potential investors are sitting on the sidelines until after the torrent of shares flood the market.

    Following the first lockup expiration, "smart money" investors were quick to sell. Shares tumbled and have been falling ever since.

  • Making Money from One Billion Users – So far Facebook's efforts to make money from

    its one billion members have failed, and its latest ideas have yet to show any improvement.

    Newly added features include: Facebook Exchange, which allows advertisers target users in real-time, based on outside Websites they visit; a new gift feature that works similar to a bridal registry; and a pay-for-post feature that allows users to make sure their post is prominently placed on a friend's page so that it will surely be seen.

    Plus, there has been talk of Facebook launching a "social search engine" that would compete with likes of Google.

Facebook Earnings Expectations

Expectations were lowered in the weeks leading up to the earnings release. Google's (Nasdaq: GOOG) disappointing results accidently released prematurely last Thursday, which showed the Internet search behemoth's ad revenue grew at the slowest pace in three years over the July-September period, set the stage for a similarly glum report from Facebook.

Last quarter, Facebook met consensus estimates of 12 cents on revenue of $1.18 billion. But it sold off sharply, slumping 11.7% after the report.

Option activity was brisk on earnings' eve with some 104,000 calls changing hands compared to the daily average of 87,000. That was more than 19% higher than the day's total put (bearish) volume for the day. The most active contracts were the November 21 calls.

In addition, short interest in Facebook stock dwindled 11% in the latest reporting period.

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