Hype can be a double-edged sword. It can generate a lot of free publicity, as it did when Internet startups Pandora (NYSE:P) and Renren (NYSE:RENN) went public. But it can also wear off and lead to something of a backlash.
So after much attention in the press ahead of their IPOs, the stocks of Pandora and Renren are flagging. Music-streaming service Pandora is trading 18% below its $16 offering price, while Renren – the Facebook of China — is more than 50% below its $14 offering price. Others, like LinkedIn (NYSE:LNKD) and Yandex (NASDAQ:YNDX), are above their offering prices but well below the highs they posted on their first day in the public markets.
Then there’s Fusion-io (NYSE:FIO). The Utah-based company makes a storage memory platform that’s hardly as sexy as a top-selling music app or a site that combines the buzz of Facebook with the economic growth of China. But its stock keeps on rising, reaching as high as $26.28 Wednesday, or 51% above its $19 offering price (the stock was off 1.6% on Thursday amid the market’s broad selloff).
Fusion-io flew into the public markets under the radar. At the time, the company was noted foe for two things. One was its chief scientist: Apple (NASDAQ:AAPL) co-founder Steve Wozniak, who joined the company in 2008.
The other was Fusion-io’s biggest customers: Facebook’s purchases of Fusion-io’s storage technology made up 52% of its revenue last quarter, and Apple’s secret data center in North Carolina accounted for another 20%. Other revenue comes through reseller agreements with Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM) — not a bad client base for a startup.
But the real reason for Fusion-io’s post-IPO success has less to do with Facebook or Apple and more to do with the technology those companies are buying. Talk about “cloud storage” to the average investors and their eyes will soon cloud over. But Fusion-io has found a better, more efficient way to manage and retrieve data for web sites and mobile apps, and some of the smartest companies in the tech industry have taken notice.
Fusion-io stands out from other storage companies in the way it approached the so-called data supply problem. The problem arose after server technology evolved much faster than the centralized databases that stores a company’s data.
Let’s say a Facebook user is checking up on an old high-school girlfriend. That’s one of many real-time requests Facebook is making from its stored data. The traditional storage system meant a Facebook server would retrieve the girlfriend’s updates and photos from a data center. But the data center was such a dinosaur that 80% of servers were idle half of the time, which means a lot of money spent unnecessarily on servers.
Fusion-io’s response took a page from just-in-time manufacturing. The company found a way to decentralize the data in highest demand onto the servers themselves. That leads to faster processing times, less cost and lower energy demands. Fusion-io’s prospectus mentions a case study involving an “internet web property” (could that be Facebook?) that saw queries processed 9 times faster with Fusion-io’s technology and data center overhead reduced by 75%.
So popular are Fusion-io’s products that revenue rose fivefold to $125 million in the nine months through March 31, from $25 million in the same period a year earlier.
But this is not a company without its share of risks. Orders like Facebook and Apple won’t last more than several quarters. There’s no guarantee other orders will arrive to replace them, or that bigger companies won’t start offering decentralized data storage.
Fusion-io also doesn’t have much of a history of profit. It posted $7 million in net income in the last quarter, and its operating margin in the quarter was 11%, compared with a negative margin of 50% a year earlier. But it was also the first profitable quarter the company showed in the prospectus’ numbers. Fusion-io has an accumulated deficit of $70 million. And it still has negative cash flows of $1.5 million in its most recent quarter.
It’s easy to see why investors are taking to Fusion-io. It’s trading at 15 times revenue, but revenue is growing quickly because of an innovative and efficient technology in an important area of cloud computing. The money raised in the IPO won’t go to insiders’ pockets but to investing in things like R&D, which Fusion-io will need to maintain its edge.
Fusion-io is the kind of overlooked dark horse investors love to bet on. While it’s currently faring better than Pandora and Renren, it has its own share of risks. And if the stock keeps rising, it could end up generating the kind of hype that is not good for recently listed stocks.