Fusion-IO: It's Not Just About Big Data, But About Fast Data

If you opened up a time capsule going back to my last article on Fusion-IO (FIO), you might surmise that not too much happened regarding share price. After all, the stock currently crosses the tape at roughly $25, and that's where it stood three months ago after announcing a killer quarter (it was their last quarter in fiscal year 2012). That may make sense since revenues were up only 11% sequentially in their most recent report with a lot of expectations for the security.

However, the stock was not stagnant. Just the opposite. It was in perpetual motion. Because of a showstopper Q4, and top notch technology, the Wall Street press has treated this company like royalty. The result was a moving target that topped the charts at $32, only to come back down to what I continue to believe is an inflated level at $25. Although I like the company, especially with a hired gun like Steve Wozniak as Chief Scientist, I still maintain this is a risky equity. Let's examine the 2013 Q1 conference call, and see what you think.

First and foremost, two customers, Apple (AAPL) and Facebook (FB), represent approximately 56% of revenues. Hewlett-Packard (HP) accounts for an additional 14% of sales, which brings us a total of 70% on the top line for just three companies. That is not diversification, although these are premium clients to have on the ledger. Many of Fusion-IO's enterprise end-users fulfill their products through OEM Hewlett-Packard. "Hyperscale accounts" like Apple and Facebook are handled by the in-house marketing staff.

Another item I consider somewhat dicey is that earnings from Q1 2013 were substantially lower than a year earlier. As presented in the press release: "Net income for the fiscal first quarter of 2013 was $3.9 million, or $0.04 per diluted share, compared to net income of $7.2 million, or $0.07 per diluted share, in the fiscal first quarter of 2012.". This may have accounted for the sell-off after the conference call.

Going forward to next quarter, revenue is expected to be flat sequentially. Stock pundits like Jim Cramer use the expression "under promise, over deliver" when describing the low balling tactic some CEO's use to goose an equity's value, but I don't think this is the case for Fusion-IO. Too many times during the conference call, company executives used expressions like:

• A macro environment that by all accounts appears to be growing more tepid.
• Visibility is more difficult in this kind of an environment. And so our customers provide a little less tail, long tail if you will, as to what their deployment schedules are.
• The macro environment is a little more attentive than it was six months ago. And our customers do in essence provide a little bit less visibility in the market. So while we know we're not immune to whatever the macro environment is up to, our solutions are more compelling in a tightening market scenario.

An additional tidbit that makes me wary about near term valuation of Fusion-IO is that revenues are back-end loaded. Full year sales growth for the company is expected to be in the range of 45 to 50%. We've already established that first and second quarters are practically flat, which means they'll really pour it on in Q4. I think that's great for the company, and the market is a forward looking mechanism, but a lot can happen in 3-6 months. What I'm suggesting is that the stock could go lower, not just on macro business conditions, but for company specific reasons.

So what's all the hubbub about the company? Their technology. It is projected to decimate the competition. Their two big clients, Facebook and Apple, are the upper crust of Silicon Valley, and primarily use leading edge technologies to remain ahead of the pack. Like the title of this post suggests, Fusion's software is faster than their rivals, and considerably more cost effective.

They produce an open system that runs on a majority of servers in the data center. With Fusion-IO's ioTurbine, Direct Cache and ION data accelerator software products, they are able to improve the capabilities of storage platforms including HP's 3PAR, Cisco's (CSCO) Blade Server, IBM's (IBM) D series, Dell's (DELL) Compellent and NetApp's (NTAP) ONTAP. In fact, during the second half of the year, recent marketing partnerships with both Cisco and NetApp will further expand Fusion's global footprint.

No stock gets a free pass, and Fusion-IO is certainly not an exception. Just look at what happened to the security after this past quarter when everything seemed copacetic. If we examine some of the measurables as provided by Seeking Alpha, we can see that the short float is 30.4%, forward p/e ratio is 222, price/sales is 5.5, and price/book is 5. That to me is a dangerous stock.

Although a legit company, it is no longer a favorite of the momentum crowd, which may put additional pressure on the equity because of negative investor psychology. Investor psychology can go both ways. My impression is that if you are a patient investor, you may be able to purchase this stock at a more advantageous price.