Can Fusion-IO Outrun The Tiger? (repost)

There is a saying that goes, “you don’t have to be faster than the tiger, you just have to be faster than your slowest friend.” That may be a constructive way of thinking about Fusion-IO (NYSE:FIO) today. There’s no question that this is a high-growth tech stock with a huge multiple and huge expectations, but that has never stopped those tech stocks that can deliver the goods. (For more, seeEarning Forecasts: A Primer.)

Big Data 2.0
In some respects, what Fusion-IO seeks to do is relatively simple. In the same way that solid-state drives (SSD) have offered consumers considerably better performance than hard disk drives, Fusion-IO is trying to bring the advantages of flash/SSD memory to the enterprise data market.

Fusion-IO sells a two-part solution. The hardware consists of products like to ioDrive, a collection of flash cards (ioMemory) containing an array of NAND flash chips and an FPGA. These attach literally to the process server (through PCI Express) and can dramatically increase the throughput rates as a result.

There is also a software component, with the Virtual Storage Layer (VSL) software arguably the most important part. This is host driver software that manages the interface between the ioDrive and the operating system. Fusion-IO also has the directCache product that allows Fusion-IO’s products to work in virtualized systems like those created byVMware (NYSE:VMW).

Why Bother?
So why is Fusion-IO doing this? Don’t EMC (NYSE:EMC), NetAppliance (Nasdaq:NTAP) and International Business Machine (NYSE:IBM) already handle the storage needs for Big Data? Yes and no. There are certainly ample virtues to the approach used by EMC (and the others), particularly when it concerns large amounts of data.

The problem, though, is that these aren’t always especially fast systems – there’s something of a “request and go fetch” aspect to it. What Fusion-IO offers is a solution that is much faster (and ultimately cheaper) when speed is of the essence. It’s not yet economical to create an entirely flash-based storage network, but it can make sense for smaller pieces of time-sensitive data.

Early Days
It’s not fair to say that Fusion-IO is a solution in search of a market, but it is fair to say that this is a small early-stage opportunity. Some analysts believe that this will be a $5 billion addressable market in 2015 – by way of comparison, EMC has logged over $19 billion in revenue in its past twelve months. That said, don’t confuse “small today” with “small forever.” Just as hard drives replaced tape-based drives years ago, SSD is going to continue to grow as the costs come down.

Competitors and Buyers
Fusion-IO has a head-start on the competition, but that won’t last very long. First, there is a risk that the VSL software becomes a commoditized product over the next couple of years. More to the point, companies like EMC, NetApp, STEC (Nasdaq:STEC) and LSI (NYSE:LSI) have this market opportunity in their sights. EMC’s Project Lightning should ship in 2012 and while not so much is known about the hardware component, EMC does already have very good storage management software.

Looking more broadly, a host of other companies could potentially get into this market. Chip companies like Marvel Technology (Nasdaq:MRVL), SanDisk (Nasdaq:SNDK), Intel (Nasdaq:INTC) and Samsung arguably have the hardware wherewithal, but need to find a way to implement the software side – something that could get easier if VSL does become a commodity.

There’s also a good chance that Fusion-IO goes into the buyout rumor mill. OEM partners IBM and Hewlett-Packard (NYSE:HPQ) could certainly use this company to enliven the growth prospects of their storage businesses, while EMC has never been shy about pulling out its wallet to cover gaps in its own technology.

The Bottom Line
There’s no point in talking about valuation on a stock like Fusion-IO; sell side analysts will assign grotesque multiples to sales or earnings three years hence, but the reality is that it’s nearly impossible to model growth stories like this correctly. Trading at about nine times trailing sales, Fusion-IO is already in the neighborhood of pure software plays like VMware and ahead of other growth hardware names like F5 Network (Nasdaq:FFIV) or Mellanox (Nasdaq:MLNX).

None of this means that the stock can’t work – the reality of growth tech investing is that multiples seldom stand in the way of further appreciation if the growth is there. It’s a consummate case of “buy high and hope to sell higher.” So long as investors understand the risks that go with that sort of investing, and the inevitability of some “hiccups” along the way that lead to occasional sharppullbacks, it isn’t such a bad aggressive play. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

By Stephen D. Simpson, CFA

 

Read more: http://stocks.investopedia.com/stock-analysis/2012/Can-Fusion-IO-Outrun-The-Tiger-FIO-EMC-IBM-VMW0117.aspx#ixzz1jqpYngsv

FUSION-IO UPDATE: IPO WEEK OF JUNE 9 (Quote, Dow Jones, Bloomberg)

QUOTE.COM

Back to Calendar Week of Expected Pricing 06/09/2011
Company Name Fusion-io,Inc.
Proposed Ticker FIO
CUSIP 36112J107
Business Description A next generation storage memory platform for data decentralization.
Lead Underwriter Credit Suisse Securities (USA) LLC,Goldman, Sachs & Co, J.P. Morgan Securities LLC, Morgan Stanley & Co. Incorporated.
Co-Managers N/A
Initial Shares 12300000
Revised Initial Shares
Initial Price $13.0
Revised Price
Final Price
Final Ticker

DOW JONES

DOW JONES NEWSWIRES

Fusion-io Inc. unveiled estimated terms for a bigger-sized initial public offering of its stock to raise funds for expansion.

The data company expects to offer at least 12.3 million shares at an estimated price of $13 to $15 each, according to its filing with the U.S. Securities and Exchange Commission.

Fusion-io plans to offer at least 10.8 million shares, while selling shareholders intend to offer at least 1.5 million shares.

The company in March initially had filed plans for an IPO of up to an estimated $150 million.

Fusion-io specializes in data decentralization, which it said improves the processing capability of a data center by moving active data to the server where it is being processed from centralized storage.

The tech sector–and particularly the data storage field–has benefited of late from increased information-technology spending by businesses.

The company reported that its loss narrowed to $1.2 million in the nine months ended March 31 as revenue soared to $125.5 million amid stronger volume. Fusion-io said revenue from its 10 largest customers accounted for 91% of its revenue in the latest period, with Facebook Inc. accounting for 47% of the total.

Prior to the quarter ended March 31, the company has posted quarterly losses since its inception. The company, which was founded in December 2005, sold its first products in April 2007.

Fusion-io shares have been approved for listing on the New York Stock Exchange under the symbol FIO

BLOOMBERG

Fusion-io Inc., a maker of flash- memory technology for companies including Facebook Inc., plans to sell shares in its initial public offering for $13 to $15 apiece, valuing the company at as much as $1.17 billion.

Fusion-io said it will sell 10.8 million shares along with an additional 1.54 million to be sold by other stockholders, according to a regulatory filing today. The stock will trade on the New York Stock Exchange under the ticker FIO.

The Salt Lake City-based company aims to raise as much as $212.2 million, up from the $150 million offering announced in March. The increase follows last week’s IPO of LinkedIn Corp., which more than doubled in value on its first day of trading, even after raising the per-share price. Founded in 2005, Fusion- io is benefiting from a shift among corporations to flash memory from traditional storage drives.

Flash has no moving parts and can access data more quickly than disks, which rely on spinning platters to hold information. Facebook, owner of the world’s biggest social network, is Fusion-io’s largest customer, accounting for 47 percent of revenue in the nine months ended March 31.

Fusion-io has raised more than $110 million in venture capital, and it counts Apple Inc. co-founder Steve Wozniak among its top executives.

Sales Surge

Sales in the first quarter surged fivefold to $67.3 million, from $13.4 million a year earlier, according to the filing. Assuming the same revenue over the next three quarters and a $1.17 billion valuation, Fusion-io will be valued at 4.35 times sales, compared with a price-to-sales ratio of about 11 for LinkedIn when its shares started trading.

Fusion-io turned profitable in the first quarter, reporting net income of $7.04 million, compared with a $6.71 million loss a year earlier.

The company’s biggest shareholder is venture firm New Enterprise Associates, which owns 39 percent of the company. Lightspeed Venture Partners holds 13 percent, and Chief Executive Officer David Flynn controls 10 percent.

Fusion-io said in January that it’s shipped more than 15 petabytes of flash memory to corporations in the past year — enough to hold more than 199 years’ worth of continuously played high-definition video. Fusion-io combines software and memory chips to speed the rate that server computers can access data.

Its products are sold through Hewlett-Packard Co. (HPQ), International Business Machines Corp. (IBM) and Dell Inc. The bulk of Fusion-io’s purchases come from a limited number of partners, with the 10 largest customers accounting for 91 percent of revenue in the nine months ended March 31.

“As a consequence of our limited number of customers and the concentrated nature of their purchases, our quarterly revenue and operating results may fluctuate from quarter to quarter and are difficult to estimate,” the company said in today’s filing.