Fusion-io: Undervalued At The Current Buyout Offering

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


Current offering is undervalued.

Growth rate has been 20% year over year at its worst.

SSD PCIe accelerated hardware industry is consolidating.

Fusion-io (NYSE:FIO) is an enterprise solution provider in the application acceleration sector. In just three years since Fusion-io went public with its initial public offering, it has received a buyout offer from SanDisk (SNDK). While the buyout offer was nearly 25% above the currently trading share price, the more in-depth look would suggest that Fusion-io is undervalued.

Present metrics

The current offering from SanDisk is $11.25 per share. This leaves a fair market valuation at approximately 9 dollars per share. While it is true that the industry and other competitors have struggled, and Fusion-io has failed to turn a profit; the growth of the company is typically valued into the share price. Last year revenue increased by 20% year on year, and the preceding year saw an 80% increase in revenue. The current offering by SanDisk does not value any future growth, and is at 2.5 times sales.

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Data provided by Yahoo

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Finance Data

Future Growth

As a new start-up, most companies see rapid growth in the first few years. This growth has slowed down; yet, it is a function of the industry itself and not specific to Fusion-io. Once the industry matures, shareholders should see growth at a moderate rate. Assuming a growth rate of 20%, Fusion-io should generate revenue of $750 million within three years. This is based on a historic modest value of growth.

20% revenue growth per year







Fusion-io has routinely scored high in product performance testing. The application solutions implemented in data centers has increased performance substantially for its customers. This in itself values the patents, and is likely the main reason why SanDisk is acquiring Fusion-io.

The Board of Directors has already approved the sale of the company, and it is expected to close in the third quarter of 2014. It is highly unlikely that the sale will not go through; yet, this transaction is on the radar screen of Fusion-io's competitors. This industry is getting smaller by the day, with the bankruptcy of OCZ Technology and other industry acquisitions. Other companies such as EMC Corporation (EMC) and NetApp Inc. (NASDAQ:NTAP) may see Fusion-io's patent portfolio as a valuable asset.

Fusion-io has traded in the low $30 per share range, and has gradually decreased over the past two years. That share price valuation was markedly high but anticipated a high growth rate. As most shareholders know, historic share price is not indicative of future performance. Just because we have not seen exploding growth, it doesn't mean Fusion-io is not a good investment.

I evaluate companies in the early stages based on two criteria: the ability to stay in business for the near term and not accrue substantial debt, and the value of the technology itself. The technology does speak for itself, and it's only a matter of time when it will come to fruition. The other aspect is the near-term viability of the business, and the above financial data shows that the business was being handled in an appropriate manner. Fusion-io has no long-term debt, and all the revenue has been reinvested back into the business. This breakeven position year-over-year is allowing Fusion-io to create a name for itself, while garnering market share.

Currently, there is not too much we can do as shareholders, but wait and see. There is little downside to holding the shares over the next three months, and waiting to find out if another catalyst emerges. I do not see too much upside either; yet, at this point in time, the upside is greater than the downside.

Disclosure: The author is long FIO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.