Fusion-io Launches A Moon Shot

Investors liked what they heard in last week's Fusion-io (FIO) conference call. As a percentage gain, Fusion-io's revenues registered high on the Richter scale, coming in for fiscal 2012 at $359 million, an increase of 82% over fiscal 2011. Although the company reported a loss of $.06/share for the year (they earned $.06/share the year prior), that didn't seem to bother traders. Hot on the heels of the analyst presentation, Wall Street bid the stock up $5.84, or 28%, to $26.85 in a single day of trading.

Fusion-io has a, "pioneering next generation storage memory platform for data decentralization", according to their latest annual report. Many in the financial press concur with their self assessment. Just last year they were crowned a Red Herring Top 100 Global Company. If this is indeed "disruptive" technology, and they are trailblazing their way through the Fortune 500, the question remains: at what price do you want to pay for this security?

Before I get into valuations and macro market conditions, let's try to dig into their business a little deeper. It goes without saying, there is an enormous amount of data out there, and end-users want it faster than ever. Facebook (FB), Twitter, you name it, they want it five seconds before now. Semiconductors have kept up with the pace of speed and innovation, but other areas of technology have lagged.

The Fusion-io annual report exemplifies the dilemma: "While processing performance has doubled approximately every 18 months, the performance of other elements in the data supply chain has not kept pace. This is especially true for the storage infrastructure, which has been designed primarily to optimize capacity growth, rather than performance growth.".

Fusion-io believes they have the answer to the data supply problem: "Many users of our platform have reported achieving greater than 10 times the application throughput per server through increased server utilization, resulting in reductions to ongoing facility, energy and cooling expenses.".

Proof positive that they making big strides in corporate data centers is their partnerships with an impressive list of OEMs: Hewlett-Packard (HPQ), IBM (IBM), Dell (DELL), Supermicro (SMCI), and a new relationship with Cisco (CSCO) all bode well for future enterprise sales for such a small company. For example, HP offers a tailored version of their technology as "HP StorageWorks IO Accelerator". Similarly, IBM incorporates a tailored version of Fusion's ioDrive product into its "InfoSphere Smart Analytics System 5600" and "WebSphere XC10 Middleware" appliances.

They now sell and support products in 59 countries around the globe. Fusion-io's customer count has more than doubled from the 1,500 they had when they went public a year ago. Now they have approximately 3,500 customers with over 50% of the Fortune 100 as clients.

In addition, the company also has a new partnership with NetApp (NTAP). It is their first partnership with a storage vendor, and will allow them to compete with Oracle's (ORCL) Exadata, and EMC's (EMC) VFCache. Those are the only two flash solutions that are in the market they bump shoulders with in the enterprise space. This is their primary market and represents the majority of Fusion-io's business.

At first glance, this sounds like they are making great headway, and they are, but the client base is a bit lopsided. CFO Dennis Wolf explains: "We had 3 customers that exceeded 10% of revenue this quarter: Apple (AAPL), Facebook and HP. In aggregate, the 3 represented 72% of revenue. Revenue from Facebook and Apple represented approximately 53% of total revenue in the fiscal fourth quarter compared to 55% in the prior quarter, and 65% in the quarter ended June 2011.".

Turning to fiscal year 2013, they expect revenue growth to be in the range of 45% to 50% over fiscal 2012 which just ended. That's impressive, but quite a bit lower than the approximately 85% sales growth from 2011 to 2012. You can't expect growth to continue at such a fast clip, even for a small company, but should be taken into consideration when examining Fusion-io's potential as an investment. If one of those three big clients comes up short on the top line, Fusion-io may get crushed. I'm not as concerned about Apple and HP as I am with Facebook. Because the company expects sales to to "modestly increase" in the next quarter after a strong Q4, I believe that this stock may come down in the next few months.

Here are additional reasons why I think the price may decline:

• First, the S&P 500 has gone from 1280 to 1400 in the past ten weeks, and may be due for a pullback, taking a majority of stocks with it.
• Secondly, companies are belt tightening on enterprise IT spending not only in Europe, but in North America, too, which could put a crimp on sales.
• Thirdly, August, September and October can be slow months for the market.
• Fourth, although non-GAAP earnings per share were $.35 for fiscal 2012, they are still not making money when using generally accepted accounting principles. Even with a non-GAAP valuation, you get a trailing twelve month P/E Ratio of 73.
• Finally, investors are being defensive before the Presidential election in November, and may jettison positions in risky assets until the results are in.

For those in the investing world, Fusion-io is not an unfamiliar name. Chief Scientist Steve Wozniak put the company on the map by pedigree alone. Throw in the "revolutionary" technology, and you've got a story to stop the presses. However, during its first year of trading, it's been as low as $15, and went to the upper reaches of the charts at $40 back in December. Q4 was great, but some of the uptake in sales was due to seasonality, where the compensation is "potentially the greatest for the sales organization", according to the conference call.

Over the next few years, a stock like this could make you money. I'd like to add it to my portfolio, but not at the current price. I'm going to wait and see what their next quarter brings.