Fusion-io: Opportunity Awaits

Mar.20.13 | About: Fusion-io, Inc. (FIO)

Fusion-io (NYSE:FIO) develops storage systems that increase the performance of systems that utilize large amounts of data. This is typically accomplished with solid-state NAND devices deployed on a PCI express bus. The target market is large corporations that process large amounts of data, and can benefit from improved performance.

Since Fusion-io has gone public with its IPO in June 2011, the share price has traded between $17 and $33 consistently. I have been trading in this range with the thought that anything around $20 is a good long-term purchase. With any small cap recently public company, the volatility is fairly high. With a beta of 3.3, Fusion-io is no exception. The volatility will likely continue for some time and will provide some good entry points. But we need to watch out for the pitfalls.

Click to enlarge

1. Short interest

Currently the shares short are approximately 31% of the share float, and is a significant amount. During the IPO, the share price was opened at $25 and was considered by many as very high. It was previously being considered to be offered in the $13 to $15 range. One of the reasons that may of led to a higher valuation is the involvement of Steve Wozniak of Apple (NASDAQ:AAPL) fame. Currently he is working as the Chief Scientist on Fusion-io's management team.

The recent delaying of orders from Facebook (NASDAQ:FB) and Apple has added to the increased activity in short interest. The guidance provided by Fusion-io has been two to three quarters in delays of orders for two of Fusion-io's biggest clients. This accounts for 50% of Fusion-io's current revenue.

Settlement Date

Short Interest

Avg Daily Share Volume

Days To Cover

2/28/2013

26,605,918

2,616,185

10.169739

2/15/2013

26,222,378

2,706,119

9.690031

1/31/2013

24,309,148

5,620,949

4.324741

1/15/2013

20,764,571

4,457,163

4.658697

12/31/2012

21,011,175

1,821,100

11.537628

12/14/2012

22,167,735

2,459,586

9.012791

11/30/2012

22,114,057

2,765,767

7.995633

11/15/2012

21,477,355

2,547,620

8.430360

10/31/2012

21,479,137

3,701,340

5.803071

10/15/2012

19,547,358

1,996,085

9.792849

9/28/2012

17,885,053

2,473,651

7.230225

9/14/2012

18,812,866

2,388,909

7.875087

8/31/2012

19,377,920

2,787,544

6.951610

8/15/2012

21,798,102

4,567,296

4.772649

7/31/2012

22,644,747

1,926,344

11.755298

7/13/2012

21,651,743

1,918,226

11.287379

6/29/2012

21,901,525

2,496,208

8.773918

6/15/2012

21,057,081

2,946,198

7.147205

5/31/2012

18,726,961

2,671,437

7.010070

5/15/2012

16,787,592

4,481,388

3.746070

4/30/2012

15,543,689

3,281,044

4.737422

4/13/2012

15,448,899

2,679,971

5.764577

3/30/2012

13,885,963

2,255,113

6.157546

3/15/2012

13,006,572

4,689,364

2.773632

Click to enlarge

Source

2. Insider activity

Starting six months ago, there has been a significant increase in insider transactions. As illustrated in the table below, the transactions are exclusively in one direction - out. While these transactions are mostly automatic and expected from Directors exercising their options, it does bring attention to the fact they are reducing their holdings to near zero levels.

Purchases

N/A

0

Sales

1,886,900

71

Net Shares Purchased
(Sold)

(1,886,900)

71

Total Insider Shares Held

17.14M

N/A

% Net Shares Purchased
(Sold)

(9.9%)

N/A

Click to enlarge

3. Earnings

Fusion-io has had considerable growth over the past three years, with total revenue being 359M, 197M and 36M for 2012, 2011 and 2010 respectively. Ten times revenue growth is significant and shows that the technology is being adopted by major players. The net earnings or earning per share are insignificant at this time as Fusion-io is breaking even. Normally breaking even is a concern, but for a start-up it is acceptable.

All eyes will be on sales and revenue during the next earnings date of April 23. This quarter's estimate is for .08 cents per share compared with .06 cents per share a year ago.

I have found that Fusion-io's guidance has always been conservative and disseminated in a timely manner. This is illustrated in the earnings history table below, where Fusion-io has surprised.

Earnings History

Mar 12

Jun 12

Sep 12

Dec 12

EPS Est

0.02

0.04

0.07

0.08

EPS Actual

0.06

0.09

0.14

0.13

Difference

0.04

0.05

0.07

0.05

Surprise %

200.00%

125.00%

100.00%

62.50%

Click to enlarge

4. Valuation

There is not an easy way to say this, but the shares are expensive by today's standards. But the keyword is today's standards. If growth continues as expected these metrics will fall more inline.

Market Cap: 1.68 B

Forward P/E : 54.9

PEG Ratio : 3.65

Price/sales : 3.65

Price / book : 3.32

52 week : -42%

The good news is that Fusion-io is operating with no debt on its books, and with a cash position of $ 368.5M. The operating cash flow has been positive around $34 million per quarter. The last three quarters have all been positive, illustrating some stability.

5. Technology

Without a solid product there would not be a company, and Fusion-io has to continuously innovate in this fast moving industry.

On March 5, 2013, Fusion-io announced it had reached a performance milestone of 9.608 million IOPS from a single 365 GB MLC Fusion IODrive2. The table below shows the recent performance breakthrough, and the large amount of data procession capabilities it has. A webcast demo will be done on March 26, 2013 at 11am MT at this link.

ioDrive2 Capacity

365GB MLC

785GB MLC*

1.2TB MLC*

3.0TB MLC

Read Bandwidth - 1MB

910 MB/s

1.5 GB/s

1.5 GB/s

1.5 GB/s

Write Bandwidth - 1MB

590 MB/s

1.1 GB/s

1.3 GB/s

1.3 GB/s

Ran. Read IOPS - 512B

137,000

270,000

275,000

143,000

Ran. Write IOPS - 512B

535,000

800,000

800,000

535,000

Ran. Read IOPS - 4K

110,000

215,000

245,000

136,000

Ran. Write IOPS - 4K

140,000

230,000

250,000

242,000

Read Access Latency

68µs

68µs

68µs

68µs

Write Access Latency

15µs

15µs

15µs

15µs

Bus Interface

PCI-Express 2.0 x4

Click to enlarge

Click to enlarge

Recently software firm ID7 has been acquired by Fusion-io. ID7 is a major contributor to the open source software project called SCST under Linux. This allows Fusion-io to be a major part of storage solutions under Linux. Currently many storage devices are running SCST in their firmware. By creating custom APIs to be used with Fusion-io's products, many customers will take the path of least resistance. These custom APIs make it harder for competitors to take market share away.

6. Competitors

While Fusion-io is a leader in this sector with many high profile channel partners (HP, Dell, IBM, Cisco and Supermicro), many competitors have emerged. The three main metrics that customers are most concerned with are speed, stability and cost. These are the areas that Fusion-io's competitors compete at. Some competitors focus more on price, while others on performance. Fusion-io is attempting to balance all three, while still purposefully pricing itself as a premium product. It is competitive starting at $3.89 / GB in its larger storage products.

The performance charts for each company are listed below for a comparison.

Intel

While Intel has only one product offering in this space, it is an area that Intel is growing. Due to its lack of scale in this space, its pricing starts at approx. $4.82 / GB.

Intel SSD 910 Performance Specs

400GB

800GB

Random 4KB Read (Up to)

90K IOPS

180K IOPS

Random 4KB Write (Up to)

38K IOPS

75K IOPS

Sequential Read (Up to)

1000 MB/s

2000 MB/s

Sequential Write (Up to)

750 MB/s

1000 MB/s

Click to enlarge

Virident Systems

Seagate has recently invested $40 million into Virident Systems in an effort to access this space. Intel Capital and Cisco Systems are also investors in Virident Systems.

NAND TYPE

MLC

MLC

Capacity (GB)

550, 1100

1100, 2200

Read Bandwidth

1.6 GB/s

2.7 GB/s

Read IOPS (4K)

160K

325K

Sustained Mixed IOPS (75% read, 4K)

100K

200K

Read Latency (512B read)

76us

68us

Write Latency (512B sequential write)

16us

18us

Click to enlarge

SolidFire

5 node SolidFire Cluster of SF3010 or SF6010 storage nodes

single volume

4k

100% random latency

.7 ms

single volume

4k

100% random, 80% read

19,000 IOPS

single volume

256k

100% sequential read

520 MB/s

single volume

256k

100% sequential write

350 MB/s

Click to enlarge

OCZ

A relatively small company ($100M market cap) in the solid state drive sector, OCZ has pushed into this sector with its version of the PCI express solid state drive.

Z drive R4 performance

Max Read

up to 2,000 MB/s

up to 2,800 MB/s

Max Write

up to 2,000 MB/s

up to 2,800 MB/s

Random Write Operations(4kB)

250,000 IOPS

410,000 IOPS

Random Write Operations(8kB)

160,000 IOPS

275,000 IOPS

Maximum IOPS

260,000 IOPS

500,000 IOPS

Click to enlarge

Conclusion

With the share price at all-time lows, competition increasing and a slowdown in orders, this is the contrarian play right now. Fusion-io needs to stay on top with its innovation in this sector. Currently it appears to be maintaining its performance edge over competitors. The issue is the low volume orders; there has to be more than just Facebook and Apple.

As data centers are upgraded in various industries, solid state enterprise drives will become more of the norm. When will this occur? As our economy improves the cash hoard that many companies have will be deployed into capital projects. This investment will bear fruit over the long term, but don't expect significant appreciation very soon.

Disclosure: I am long FIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.