In recent weeks, investors have lapped up technology IPOs like crazy. We’ve done our best to warn you not to get caught up in the hype, noting why you should avoid Groupon, but take a closer look at LinkedIn.
Last Thursday, another IPO hit the markets – Fusion-io (NYSE: FIO), which makes data storage hardware and software that boosts data center speeds.
The company boasts a first-class client list, with Facebook and Apple (Nasdaq: AAPL) as two of its newest customers. And Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM) and Dell (Nasdaq: DELL) all resell servers using Fusion-io’s technology.
Being involved with such heavy hitters is probably a significant reason why many investors bought into the IPO hype.
When the stock began trading, it jumped above $25 per share – about 33% above the offering price of $19 per share. But by the end of the day, the stock had faded and closed down almost 10% from its intra-day high.
That kind of bumpy ride is pretty typical for the first day of trading. But with that frenzy behind us, let’s take a closer look at how Fusion-io should perform down the road…
Fusion-io Missed the Mark… Big Time
Recall that before LinkedIn (NYSE: LNKD) went public last month, we tested the company’s fundamentals against five hallmarks of a successful IPO. It passed, indicating LinkedIn’s ability to survive long term.
So let’s see how Fusion-io stacks up against the same test:
~ Age: Since more established companies tend to fare better during an IPO, the fact that Fusion-io was founded in 2005 should indicate a green light, right?
Not so fast. A peek into the company’s S-1 shows us that it didn’t actually start selling products until April 2007 and that the majority of its growth didn’t kick in until the end of 2009. Sorry, rookie… you’ve failed this test.
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~Revenue: As we’ve mentioned before, companies with more than $50 million in sales before they go public tend to gain momentum after an IPO, rising by an average of 38.8% over three years. So it doesn’t bode well that Fusion-io’s sales only hit $36 million in 2010.
~ Verifiable Growth Opportunity: Fusion-io’s sales blasted from $648,000 in 2008 to $36 million in 2010 – an impressive 5,455% jump in two years. But don’t expect such rampant growth to continue much longer. Why?
Well, much of that boost is due to Apple (Nasdaq: AAPL) and Facebook. Revenue from these companies alone accounted for 20% and 52% of its total sales, respectively.
And since most of Fusion-io’s business comes from installing large-scale data storage facilities, it doesn’t benefit from repeat business to its customers, either. And as for service/maintenance contracts… forget ‘em. They “typically have a one-year term” and only accounted for 2.8% (or $1 million) of its 2010 revenue. In other words, unless a giant company like Google (Nasdaq: GOOG) hops on board, once Fusion-io’s current deals fizzle out, look out below.
~ Profitability: According to Fusion-io’s S-1 filing: “We have incurred significant net losses during our limited operating history and may not consistently achieve or maintain profitability.”
Need we say more?
To be fair, though, that’s boilerplate language included in the S-1 filing for most startups. And as The Wall Street Journal says, nowadays “losing money seems hip… Groupon has gotten a wild reception for its IPO filing… [even though it’s] losing money — gobs of it.”
Of course, we’ve already broken down why we’re not giving into the Groupon hype. And we’re similarly pessimistic about Fusion-io, too.
Although the company is trending toward profitability, it counts on large purchases from a limited number of customers for the majority of its revenue. In fact, over the past nine months, the top 10 customers accounted for 91% of sales.
Lose one of them and hopes of profitability are eroded. That’s not a risk we think investors should gamble on.
~ Valuation: Fusion-io had originally filed to price shares between $13 and $15. But the company ended up getting $19 per share, which values the company at about $1.5 billion. That’s just too rich for our liking.
And even if we give the company the benefit of the doubt and use the most recent quarter’s results (remember, aided by big orders from Facebook), the company is still trading at a price-to-earnings ratio of more than 60. And that certainly doesn’t qualify as “undervalued.”
All in all, not a strong showing. And that doesn’t bode well for the company’s long-term stock market performance.
Ahead of the tape,
Louis Basenese & Justin Fritz