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Facebook’s IPO? No Way! Buy This Underhyped Stock Instead

Earlier this week, Apple’s (Nasdaq: AAPL) co-founder, Steve Wozniak, told Bloomberg Television he would buy Facebook’s IPO – which is scheduled to start trading on Friday – regardless of its valuation.

“I would invest in Facebook,” said Wozniak. “I don’t care what the opening price is.”

Really, Steve? I can guarantee you that a “buy at any price” strategy isn’t a successful one. No backtesting required.

Nevertheless, I know there are countless investors out there that fall into the same camp as Wozniak. They’re buying into all the hype, just to make sure they don’t miss out.

Even if the company jacked up its pricing range on Tuesday to $34 to $38 a share from the previous range of $28 to $35. And even if the fundamentals don’t exactly stack up, which I noted here, here, here, here, here and here.

To borrow Mr. T’s catchphrase, “I pity the fool.” But I’m not going to waste any more breath on warnings about Facebook’s IPO.

Instead, I’m going to offer up an alternative – a way to benefit from the Facebook IPO hype without all the risk.

Here’s how…

The Smartest “Because of Facebook” Investment

In previous columns, I’ve railed against social gaming company, Zynga (Nasdaq: ZNGA), because it relies almost entirely on Facebook to generate revenue. (In the last quarter, Facebook accounted for 92% of Zynga’s sales.)

But what if we could find a company that generated a modest amount of revenue from Facebook, and therefore was levered to the social networking giant’s growth? Well, then we’d have the perfect “because of Facebook” investment.

And that’s where Fusion-io (NYSE: FIO) comes in…

Founded in 2005, Fusion-io is a data decentralization pioneer. Its software and hardware solutions allow customers to efficiently get data to where it needs to be processed and analyzed.

I’ll spare you all of the technical mumbo jumbo. All you need to know is that the company’s products bring just-in-time manufacturing – where the raw materials are located right next to the factory to ensure availability when demand hits – to the data center. Only in this case, instead of putting raw materials close to the factory to be processed, we’re talking about putting critical data closer to servers to be processed.

The end result? Dramatic increases in performance and efficiency.

For instance, Fusion-io’s products helped one internet company process almost 10 times more queries over a specific period of time. They helped a digital media sharing company improve customer access speeds by roughly 66%. And they helped an IT security service company reduce its data center energy consumption by more than 40%.

The last example highlights another key benefit of Fusion-io’s products. As a consequence of processing data faster and more efficiently, Fusion-io’s products also help cut down on the number of servers required and, in turn, the amount of energy required to run a data center.

Faster performance and lower operating expenses? Talk about a win-win product. It’s no wonder the company already boasts a blue-chip client list, including Apple, Dell (Nasdaq: DELL), IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and – you guessed it – Facebook.

In fiscal 2010, Facebook accounted for 10% of Fusion-io’s sales. By fiscal 2011 that percentage jumped to 36%. So it stands to reason that the more Facebook grows, the more data it’s going to create and, in turn, the more it’s going to rely on products from Fusion-io.

In other words, Fusion-io represents an indirect way to profit from Facebook’s IPO. Rest assured, though, the investment case for Fusion-io extends beyond Facebook.

A Timely Acquisition Candidate, Too

As I’ve told you before, IDC predicts that the amount of data businesses handle is going to increase 44-fold by 2020. Not to mention, consumers are increasingly demanding real-time access to data. So unlike Facebook, Fusion-io delivers a worthwhile – and increasingly necessary – service.

That explains why so many blue-chip companies are already customers. But there’s no reason that any one of them can’t become an owner, too.

You see, despite solid growth, Fusion-io’s stock is down 45% from its November 2011 high, making it a more affordable takeover target. And there’s definitely an urge to merge in the sector.

EMC Corp. (NYSE: EMC) recently paid $430 million to acquire Israeli startup, XtremIO, which is a flash memory storage company similar to Fusion-io. And rumor has it Dell recently offered to buy Fusion-io for $33 per share, but was denied.

If the rumors about a spurned takeover offer are true, management must believe Fusion-io’s growth prospects warrant a higher multiple. I’d agree. And there’s no denying that Fusion-io’s major customers could easily afford to pay more to buy the $1.9 billion market-cap company.

Dell, IBM and Hewlett-Packard, which all represent strategic fits, are sitting on cash balances of $14.8 billion, $12.3 billion and $8.1 billion, respectively.

Bottom line: We can live without Facebook. But companies, including Facebook, increasingly cannot live without data decentralization services offered by Fusion-io.

So if you’re dead set on investing in the most overhyped IPO in history, consider doing so in a roundabout manner. Buy Fusion-io instead. It’s certain to benefit because of Facebook, but also from its own strong growth and takeover appeal, too.

Ahead of the tape,

Louis Basenese

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