Stock Could Rebound if New Management Executes

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Fusion-IO (NYSE: FIO) is a stock that is down over 50% since its peak and has not showed many positive signs upon first look. Insiders sold off along with institutional investors. However, the company is undergoing a management change following the departure of their CEO and two other co-founders. All the bad news may be priced in, and the stock could be poised for a rebound.

Fusion-IO provides data center solutions to accelerate databases, virtualizations, cloud computing, big data and other business applications. Its solutions are used by e-tailers, large data centers, and global enterprises. It offers an integrated hardware and software platform that allows decentralization from specialized hardware and architectures. It sells both through a direct sales force as well as hardware manufacturers like Cisco, Dell and IBM. Apple (NASDAQ: AAPL), which has also been down in the last year,  and Facebook (NASDAQ: FB) account for over half of Fusion's 2012 sales. Growth is forecast to come from these two customers and increasing from other companies as well. Apple had sales gains of over 10% in the last year and Facebook had a 37% gain in revenue. These two companies are growing and have reputations for only using the best of the best, so the fact that they have done business with Fusion is a great sign. Apple has a massive cloud computing system that is growing every day as Apple users buy videos and music. Facebook has over a billion users and many have hundreds of pictures plus video, so Facebook will be in need to manage data for a long time to come.

Dramatic decline in the stock price

The stock reached a high of $32 in early October 2012 but since has significantly declined to $14.65 per share currently. The stock is historically highly volatile, frequently doubling and then making the roundtrip back to levels in the mid-to-upper teens, often multiple times in a twelve month period. Just on a quick look, it appears investors get excited and then the company disappoints within a few quarters leading to dramatic sell-offs.

Insiders and institutional investors both sold a significant amount of shares over the past six months, much of it ahead of the CEO and two co-founders leaving the company in one day. More than a few insiders sold a total of 1.87 million shares in six months, 10% of net insider holdings, and made no purchases. Institutional investors also had net negative sales of 3.68 million shares. Both of these, particularly insiders not stepping in to buy despite the decline of over 50%, are indicative of problems. Furthermore, many insider sales came after the shares had already declined to the mid-to-upper teens.

Management goals could drive improved profitability

The new management team is focused on doubling revenue. Initially, management plans to expand international revenues, find significant new customers and markets. It will also launch its next-gen ioScale and ioDrive in the second half of 2013 and move SDK to general availability. Management has also targeted a gross margin in the range of 56-58%, in 2012 gross margins ranged from 51%-57.5%. The next-gen products mentioned will help drive margins in this direction in FY13. The company previously almost doubled its sales force and expenses grew faster than revenue. These news sales people and decreasing investments in low margin projects will help turn around bottom line profitability.

Competitors

In the broader data acceleration market, Fusion competes with flash memory companies. EMC (NYSE: EMC) is the biggest competition Fusion faces. EMC has introduced a flash based server, XtremeSF, and this product has millions in marketing and promotion behind it. The XtremeSF cards do lag in terms of performance, but are cheaper to buy and maintain.  Fusion may be able to compete with products but it certainly cannot compete with company size.  EMC made over $2.7 billion in net income in 2012 off of $21 billion in revenue.  Fusion, on the other hand, only had $432 million in revenue and didn't turn a profit.  Another competitor, STEC (NASDAQ: STEC) competes more on Fusion's scale.  STEC sold $139 million worth of product in the last four quarters and didn't make a profit.  Fusion and STEC both lost market share last year while the giant EMC picked it up.  EMC is definately the heathiest of the companies and also trades at lower price than Fusion when you compare price to sales.  STEC has the lowest P/S ratio but they are also losing the most money.  Revenue for STEC was cut in half in 2012, making it very hard to breakeven.

Conclusion

The company appears it is at least in the very early phase of driving improved profitability. It has a plan, and over the coming quarters, particularly beginning in the second half of 2013, results should start to appear. However, at this early phase, new owners of the stock are essentially buying the new management team’s ability to turn things around.

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Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple, EMC, and Facebook. 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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