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Fusion-io: Why Big Tech Will Make a Beeline for This Company

“Way to leave us hanging, Lou! Don’t you have any specific and timely tech takeover targets for us to consider?”

So reads an email I received in response to my column on Wednesday.

In it, I predicted that we’re on the cusp of a mergers and acquisitions bonanza in the tech sector.

The catalysts? Record high cash holdings at tech firms, abysmal organic growth rates and cheap valuations.

As for the best takeover candidate right now? Well, it’s time to put Salt Lake City’s Fusion-io (FIO) at the top of your list…

Big Profits in Big Data

Founded in 2006, Fusion-io is a data decentralization pioneer. Its software and hardware solutions allow customers to quickly and efficiently process and analyze data.

Needless to say, that’s critically important today, as more people get connected to the internet and we create ever-increasing amounts of data.

As I showed you a few weeks ago, we’re still only in the early innings of this data explosion, too. Over the next three years, global data creation and sharing are expected to almost quadruple.

That means demand for Fusion-io’s products is bound to increase, too. And it’s no surprise that it already counts many blue-chip companies as customers – including Apple (AAPL), Facebook (FB) and Hewlett-Packard (HPQ).

Growth prospects aside, though, it’s Fusion-io’s technology that makes it such a timely takeover target…

The Domino Effect

I’ll spare you the industry mumbo-jumbo about how Fusion-io’s storage devices use chips that increase both density and speed.

All you need to know is that it sells cutting-edge, patent-protected, solid-state drives (SSDs).

And therein lies the opportunity.

If you recall from Wednesday’s column, sTec (STEC) also makes SSDs.

So in the wake of Western Digital’s (WDC) $340-million purchase of sTec, it puts Fusion-io in the buyout crosshairs, too.

That’s because buyouts in one industry often trigger more takeovers, as companies are forced to make acquisitions to stay competitive – essentially, a domino effect.

So here’s a chance for a potential suitor to scoop up one of the market’s leading (and last) small-cap SSD makers.

One with “defensible intellectual property,” according to Mizuho Securities’ Abhey Lamba. And on the cheap, no less.

Fickle Investors Are Gift Wrapping This Opportunity

Last month, Fusion-io’s stock plunged more than 20% when the company’s Co-Founder, Rick White, and CEO, David Flynn, unexpectedly resigned.

Shares have failed to recover since then – even though the selloff was clearly overdone.

Understand that his departure wasn’t because the company’s prospects were fading. In fact, immediately following the news, the company reaffirmed its previous financial guidance.

It expects sales to grow by about 20% this fiscal year (which ends tomorrow). And based on estimates, that growth is going to accelerate in fiscal 2014, with sales forecast to jump by 30%.

So, long story short, there’s nothing fundamentally wrong.

And that’s critical.

I never recommend buying a company based solely on its takeover potential. The numbers need to warrant a buyout, too. Otherwise, if a deal never materializes, we’re hosed.

We’ll be stuck holding a fundamentally weak company whose price is likely to fall.

That’s not the case with Fusion-io, though. It’s a high-growth company operating in a hot industry…

The Trade Heard ‘Round the World

Fusion-io’s success has led to a rock-solid balance sheet, with no debt and over $300 million in cash.

My analysis shows that the company is easily worth $20 per share on a stand-alone basis. That’s 43% higher than the current price.

But in an acquisition, the upside is even greater. I’m convinced Fusion-io could fetch upwards of $26 per share – a potential 86% gain.

One way or another, Fusion-io is poised to rally. And I’m definitely not the only one who thinks so.

On Tuesday, options trading volume in Fusion-io more than quadrupled, with calls outnumbering puts by roughly 9-to-1, according to optionMONSTER’s analysis.

It appears that a single investor might have placed a $1-million bet that the stock will be higher than $15 by mid-January. Talk about confidence!

I suggest you follow suit. Well, perhaps not with $1 million! But either enter a small position in the stock outright, or consider buying the just out-of-the-money January 2014 $15 call options.

The Big Data boom isn’t going anywhere. In fact, it’s only going to grow from here – and Fusion-io is in prime position to capitalize on it.

Ahead of the tape,

Louis Basenese