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Fusion-io (FIO) is an example of a high quality company with an interesting, innovative product in a secular growth market. The best analogy that I can make to Fusion-io's very high performance and low latency PCIe flash accelerators for enterprise usage is to the 3-D graphics accelerator pioneered by companies such as Nvidia (NVDA), 3DFX, and AMD (AMD). The technology is extremely useful, it's disruptive, and now more players want "in" on this new opportunity.

Shares of Fusion-io have been on a wild ride since the IPO in 2011. After closing at $24/share on IPO day, the stock has moved up to as high as $40 to as low as $17.45. It is incredibly volatile, the options premiums are absurdly steep, and the stock is very heavily shorted. That's why the earnings report on 1/30 will be a gigantic deal: either the stock will rocket to its 52-week highs, or it will plummet to its 52-week low (and maybe even below). While my crystal ball certainly doesn't work as well as I'd hope it would, I'll take a look at the key numbers that Fusion-io needs to meet/exceed for investors to become more positive on the stock (and conversely the numbers that they need to miss for the thing to plummet).

The Current Quarter

The sell-side is looking for the following numbers for the current quarter:

  • Revenue of $120M (+43% Y/Y)
  • EPS of $0.08 (+60% Y/Y)

Interestingly, these numbers were actually a disappointment when they were given as guidance at the last earnings report. While the company beat sell-side estimates for that quarter, it was only because a large order that was actually expected in Q2 (current quarter) was pulled into Q1. The net result was that Fusion-io "met" the expected Q1 + Q2 in terms of results + guide, but since the Street had become so addicted to Fusion-io's habit of "under promise, over deliver" that simply doing "well" wasn't good enough for the company.

I would expect that any upside surprise in the current results (assuming no order pull-in from the next quarter) would certainly be helpful in triggering a short-squeeze, and that any material miss from the analyst expectations would be frowned on quite heavily.

That being said, while this quarter is important, Wall Street always looks to the future (since companies are more-or-less expected to hit their guide, the guidance is really the important part), so the real driver for the stock price will be what the firm gives out as guidance for Q3.

The Next Quarter's Estimates

The Street is expecting the following guidance out of Fusion-io:

  • Revenue of $137M (+45% Y/Y)
  • EPS of $0.09 (+50% Y/Y)

Now, keep in mind that the "cat is out of the bag" so to speak -- Fusion-io already gave full year guidance, and as a result, the stock briefly floated in the $30+ range, likely on expectations that this guidance was conservative (which, the last quarter seemed to indicate, it was not).

Should Fusion-io surprise to the upside and come out with a revised full year guidance, or should it beat the above estimates (which are crafted assuming the full year guide was good), then the stock will likely undergo a very massive short squeeze. In the case of a "meet", I can still see some short covering happening since, quite frankly, high double digit growth of this magnitude at >50% gross margin is very hard to come by in this market.

But the macro-economic environment is tough. EMC (EMC), VMware (VMW), Intel (INTC), and others are all very cautious about enterprise IT spending, which is probably why Fusion-io has been getting hammered consistently over the last few days. However, while the traditional enterprise IT space is rough, there have been a number of positive developments to give Fusion-io longs hope:

  • Apple (AAPL) is keeping CapEx spend quite high, with a nontrivial portion of the spending allocated to the firm's data-center/iCloud (which are powered by Fusion-io)
  • The cloud segment in general -- highlighted by Intel as a high double-digit percent growth driver for its data-center business -- is likely to outperform the general enterprise IT market
  • Fusion-io has a first-to-market advantage in addition to a stronger/more featured product relative to the few competitors that are out there (LSI (LSI) is the most prominent, and Seagate (STX) announcing a partnership and equity stake in Virident)

The negatives, and in some instances double edged swords are, of course:

  • Fusion-io has a high concentration in a few customers. Should any of these firms choose to second source from a competitor (even with less competitive solutions), then sales could take a significant hit, or margins will take a hit in an attempt to keep the mix of Fusion-io's products relative to competitors' within that customer's data center rich
  • Fusion-io may, in the longer run, face stiff competition from the NAND vendors such as Samsung, Micron (MU), or Intel in the PCIe flash accelerator/storage space. Given that Fusion-io sources NAND from third parties, it is at a slight disadvantage here (but as a positive, the majority of Fusion-io's product value is in the software stack and not necessarily in the NAND, which is commodity)
  • Fusion-io's valuation is quite rich. At a forward P/E 33, and with the likelihood of a multi-year sustained mid-to-high double digit revenue growth unlikely, any missteps on the company's part could very seriously strip the company of any premium valuation

Conclusion

So you know the numbers that the company needs to hit, and you know the basic story behind the stock. This is a high risk/high reward play before earnings, so know what you're doing, take appropriate risk mitigation measures (whether you're long or want to trade the report), and understand that right now, any company in the storage space and/or the enterprise space is going to be very, very heavily scrutinized. If Fusion-io hits it out of the park, a gap up to $30+ isn't unreasonable. If they falter, then new all-time lows could await investors ahead of the report.

Best of luck, and I will be back with a full analysis of the earnings report tomorrow. Stay tuned.

Source: Fusion-io: Brace For Impact

Additional disclosure: I am short $18 February 16 puts. I may go long FIO common stock within the next 72 hours as well.