The Bear Case for Fusion-IO, Inc. (FIO): Part Two

Page 1 of 2

In Part 1 of this piece, I introduced the business of Fusion-IO, Inc. (NYSE:FIO) and one reason to believe this stock should be shorted. In this installment, I introduce two new bear cases and one variant view.

Fusion-IO, Inc. (NYSE:FIO)

2. “Yet another IT company”

The decreasing rates in revenue growth show that it is easy to be a competitor, as there are low barriers to entry in this business. At first glance, the product and business of Fusion-IO, Inc. (NYSE:FIO) may sound very complex. Therefore, since Fusion-io was a pioneer in this field, one could infer that the company has strong competitive advantages in this field set in motion. This could lead to a buy conclusion.

Unfortunately, competition already has arrived. And although FIO was a pioneer in this field, its product may not be the best one available at the moment. Not anymore.

For example, with 60 employees, Virident (privately held) has manufactured an excellent product. In a recent paper, Neal M. Master et al. benchmark five data storage devices, including Fusion-IO, Inc. (NYSE:FIO)’s ioDrive and Virident’s tachIOn card.

The result: “At low concurrencies, the Fusion-io ioDrive card is the best performing. However, at eight threads the performance advantage passes to the Virident tachIOn card, which with 128 threads achieves almost 50% greater performance than the Fusion-IO, Inc. (NYSE:FIO) card.” The paper compares various options and is in favor of Virident on most metrics. I present the results obtained for random write and read processes with 4KB block sizes below:

The story does not end here. As I mentioned in my first article, LSI Corporation is also in the same game and is already making some impressive sales. Because they just entered this market in late 2012, I expect their growth rate for this segment to resemble that of Fusion-io back in 2009. This is definitely not good news for Fusion-IO, Inc. (NYSE:FIO).

But do not think that all companies in the flash memory business are doing great. LSI is probably an exception. Furthermore, not all companies that are still in the HDD industry are doing terribly. We know that the shift towards mobile computing will eventually make solid state drives (SSDs) and flash memories replace the hard disk, but that is not happening in the short run. For example, Seagate Technology PLC (NASDAQ:STX), a hard disk manufacturer, has seen its stock price rise 90% this year. Why is this happening? Well, providing the “best technology” is not necessarily a guarantee of success. Seagate may not provide the best technology, but they do provide some of the best products among the HDD technological segment. Furthermore, the ongoing share buybacks, dividends and a great management team have all contributed to the success of Seagate.

At this point, it is worth mentioning that Fusion-IO, Inc. (NYSE:FIO) does recognize the quiet increase in competition as a major risk. On page 36 of the latest 10Q filing:

Significant developments in data storage systems such as advances in solid state storage drives or improvements in non-volatile memory may materially and adversely affect our business and prospects in ways we do not currently anticipate.

Well, that’s exactly what is occurring nowadays. And although it is too early to see a reflection of this phenomena on stock prices, I show below the one month performance of Fusion-IO, Inc. (NYSE:FIO) and LSI. Notice the inverse correlation: while Fusion-io seems to be losing momentum, LSI’s upward momentum is improving.



3. The acquisition of NextGen could be a sign of desperate need for organic growth

We know that expectations are high for the next quarter (June) and that increasing competition is making it hard for the company to keep the current level of sales. In the absence of organic growth, it seems that the main reason for buying NextGen is to add $5-$10 million of sales.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!