Will This Busted Tech Stock Ever Return to Glory?

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Anybody that has invested in Fusion-io (NYSE: FIO) since the IPO back in 2011 probably has given up on catalysts for a rebound. The stock originally plunged as top customers Apple and Facebook supposedly reduced spending for the short-term, yet it has now led to the founders leaving the company, further questioning its growth potential.

The leader of server-side flash storage has seen a lack of growth in the two key customers along with a more competitive landscape where competitors could potentially offer a similar product for half the price. Analysts now debate whether the former flash storage leader can ever return to glory as the business becomes more commoditized with bigger players joining the fray and the founders gone. In fact, old storage leaders Micron Technology (NASDAQ: MU) and Seagate Technology (NASDAQ: STX) have greatly outperformed the darling IPO since it went public.

See chart below for the one-year returns:

<img alt="" src="http://media.ycharts.com/charts/996cf8fd518c5ff47bda2d7fb49695a2.png" />

FIO Total Return Price data by YCharts

Positive analysts

The bullish analysts forecast revenue growth of 21% in 2013 and another 30% in 2014 even as Fusion-io faces a tough climate with existing customers and margin pressure. Even the bullish analysts place limited gains on earnings. In fact, analysts expect fiscal 2014 earnings to be lower than 2012 even with the bullish revenue growth.

At the end of June, UBS predicted that the next 30% move by Fusion-io would be a 30% gain by issuing a $19 price target while the stock currently trades below $14. This note is definitely bullish considering all the relentless downside pressure.

Negative analysts

The negatives appear to be winning the day with the stock trading near all-time lows. Jordan Novet of Gigaom wrote a great piece highlighting the issues leading the stock to these lows. Jordan makes a great point about bigger competitors EMC and IBM making pushes into the flash storage space and how Rackable Systems faced huge revenue declines when Facebook left as a customer.

Jim Bagley, senior analyst at Storage Strategies NOW, sees foundry operators such as Intel, Micron, and SanDisk as huge challengers for enterprise customers. He sees those competitors as being able to eventually offer a similar solution for half the price.

Analysts Howard Marks of DeepStorage sees the competitive advantages of Fusion-io dissolving over time and ironically used the same example of customers being able to buy similar products for half the price.

New management

While the analyst positions appear to offset each other, the real negative is the pair of co-founders leaving the company with it struggling. Did they abandon a sinking ship?

On May 8, David Flynn resigned as CEO and President and Rick White resigned as Chief Marketing Officer. A turnaround is hard to imagine taking place with these two co-founders and leaders leaving the company.

Shane Robinson was named the new CEO and President. Robinson most recently served as Executive Vice President and Chief Strategy and Technology Officer of Hewlett-Packard until Nov. 1, 2011. While clearly somebody with experience in the technology sector, a vice president from HP back in 2011 doesn’t instill a ton of confidence compared to the guys that were seen as leaders in flash storage.

Storage leaders

Maybe, size ultimately matters and Micron and Seagate will eventually eat the lunch of Fusion-io by converting to flash storage options just as the sector takes off. Unfortunately, sometimes firms aren’t able to convert a hot new technology into a commanding lead as the giants wake up and overthrow the challenger before it gains enough scale.

With the inability of Fusion-io to derive significant profits from those two large customers, it is now stuck with a much higher PE ratio than both Micron and Seagate. The later trades at a remarkably low 8 times forward earnings even after seeing strong gains. In addition, Seagate offers a 3.4% dividend yield on top of that.

Micron isn’t too far behind with a 15 times forward earnings multiple and could see more gains if earnings estimates for fiscal 2014 continue to jump. The stock doesn’t offer the dividend yield, but analysts are becoming ever more bullish on earnings next year. The expectations have jumped from $0.65 to $0.95 with the high-end analyst forecasting $1.40.

Bottom line

Fusion-io doesn’t appear to be a tech stock headed back to glory. The negative analysts expect competitive pressures to erode market share while the bullish analysts expect strong revenue growth. Unfortunately, neither group expects the future to be overly positive to earnings as the numbers hover below the reported earnings for fiscal 2012. Until Fusion-io shows the ability to fend off competitors with profitable growth, investors need to avoid this stock even at all-time lows.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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