Fusion-io (NYSE:FIO) has been under much distress, with its shares trading at an all-time low in the past five years. While this does seem like a bad situation, the company still has a lot to offer and has in my opinion bottomed out.
In the wake of the recent acquisition of competitor Virident by market leader Western Digital, investors can be hopeful for a similar fate for Fusion-io as well, considering it is a much better and more lucrative option for any potential acquirers.
Fusion-io is a Utah based American computer hardware and software company that develops as well as sells storage memory platforms internationally. Its customer base includes entities from different markets such as manufacturing, the energy industry, the internet, financial services, education, retail businesses among others. Fusion-io's hardware and software solutions are greatly employed in cloud computing, big data, virtualization and databases in enterprises and hyperscale datacenters. Fusion-io considers Apple and Facebook as its chief customers.
Fusion-io in the market today
Fusion-io's shares closed at a price of $13.99 per share, experiencing a gain of 1.08% from an opening share price of $13.84. The stock is currently trading at 65x its estimated future earnings projected for next year, with a current market capitalization of $1.35 billion. Fusion-io's stock price has experienced a major decline over the past one year with shares dropping from $30.27 to $13.99; a 53.78% decline year-over-year.
While the valuations would deem the company highly expensive, it should be taken into account that the P/E multiple only reflects earnings potential and not the value of IP, cash and other assets. This is also reflected by a P/B ratio of 2.66x, much lower than sector average of 4.3x and pretty much in line with industry average of 2.11x.
Fusion-io's revenues have grown by 20.32% year-over-year, however, it has reported losses for the two previous years ending June 30th 2012 and 2013, with its losses increasing from $5.58 million to $38.25 million, a 583% increase year-over-year. Also, the company missed its analyst revenue estimates for the final quarter for the same fiscal year (Q4FY13) by almost 4%. The company's current assets have declined over the past fiscal year, in addition to a decline in EPS from -0.06 in FY12 to -0.4 in FY13, a decline of 566% year-over-year.
Fusion-io's financials do not look very encouraging, and the company has been incurring high administrative expenses, meaning that the company needs to control its internal expenses in order to reduce losses. However Fusion-io has also been spending a lot on research and development, which means that the company aims at producing better and more advanced products in the future, which could help grow revenues in the future. According to Bloomberg, Fusion-io's revenues are estimated to grow a good 83% by 2016.
The main issue with the company is not growth in sales but controlling its revenues to show some stability at the bottom line. A lot of this is due to high R&D which will eventually show results on the topline. This shows that the issues of Fusion-io can be short term and the company does have the ability to turn a profit pretty soon.
The flash memory market today
The company has been suffering financially for the past two financial years and thus does not have a very good outlook so far. However, the recent purchase of competitor Virident by Western Digital (WDC) has raised speculation that Fusion-io, being a company of good rapport when it comes to products and a customer base, has great chances of being acquired by a larger company in the market. This speculation has been met with much optimism, and the company's stock even experienced a 26% gain in price when the Virident acquisition was announced.
Western Digital's chief rival Seagate (STX) is considered to be a probable acquirer of Fusion-io, since analysts believe that it would need to bring itself at par with Western Digital in terms of products and manufacturing capabilities. Fusion-io considers Facebook and Apple as its chief customers, which also makes it a favorable entity when it comes to deals. Thus Seagate acquiring Fusion-io would be purchasing a company that could contribute high growth prospects for Seagate in addition to delivering a strong position in flash memory, being a stronghold for Fusion-io. In addition to that, according to Bloomberg, Fusion-io trades at 2.5x of its sales, having a market value of $1.3 billion, which is very cheap when it comes in comparison to the 6x of sales that Western Digital agreed to pay for Virident.
The reason Seagate is expected to seriously consider acquiring Fusion-io is its need to expand its base in cloud computing, considering its higher demand as the worldwide web expands its horizons every day. Cloud computing capabilities are the strength of Fusion-io, thus making it a favorable option for Seagate to acquire it. Other prospective buyers for Fusion-io also include EMC Corp.
The current market conditions suggest that Fusion-io has great chances of being acquired considering its strength in terms of its products and customers, as well as its comparatively lower market value pertaining to recent financial performance of the company. Thus in case a strong customer such as Seagate acquires Fusion-io, its stock price might rise, followed by improvements made to the company. Also, the company's stock is currently trading in its lowest range in five years, selling at $10.51 in late August this year, thus making it a good preference for acquisitions, which could also push its price upwards.
Considering the above mentioned factors, Fusion-io could be considered as a buy as it has already bottomed out and is a good target for both Seagate and Western Digital. Investors not hopeful about an acquisition can bet on the company's ability to turn around which is pretty evident from growth in revenues and high spending on R&D.