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Stay Away From a Beaten-Down Fusion-io

The CEO and chief marketing officer are bolting


When Fusion-io (NYSE:FIO) reported its fiscal Q3 results a few weeks ago, things looked pretty good. The stock spiked 17% as the company beat expectations on the top and bottom lines and announced a positive outlook.

Not too shabby.

Today, though, things turned sour for the company — a top player in the fast-growing flash memory storage market. So far, shares shed over 27% and hit a 52-week low just over $13.

The reason? Well, the company’s CEO David Flynn announced he is leaving the firm … along with chief marketing officer Rick White. Both founded the company.

Flynn’s sudden is certainly worrisome since it is relatively soon after the company’s IPO, which was pulled off in June 2011. And the reason for the move is that he is looking for “entrepreneurial investment opportunities.”

The message is clear: Fusion-io just doesn’t seem like a good place for him to spend his time!

Now it’s true that the replacement for Flynn is a 30-plus-year veteran, director Shane Robison. He’s worked at companies like AT&T (NYSE:T), Cadence Design (NASDAQ:CDNS), Apple (NASDAQ:AAPL) and Hewlett-Packard (NYSE:HPQ). He also boasts a lot of experience with mergers and acquisitions.

Still, Robison has some doubters. One item on his resume: HP’s acquisition of Autonomy … which turned out to be a disaster.

Plus, Fusion-io has some other red flags. Keep in mind that about 83% of revenues come from 10 customers. In fact, Facebook‘s (NASDAQ:FB) share is 16% and HP’s is about 19%.

Because of this concentration, Fusion-io’s revenues can be volatile. The delay from a couple customers can definitely have a big impact. In fact, that’s precisely why third-quarter revenues fell by 7% to $87.7 million.

At the same time, Fusion-io must fend off tough competitors. There are biggies like EMC (NYSE:EMC) and Hitachi Data Systems, along with a variety of fast-growing start-ups also gunning for the flash market.

So while Fusion-io’s shares are much cheaper now — with the enterprise-value-to-revenue ratio at 3x — there are still some headwinds.

Besides, the company will need to deal with a leadership transition, which is never easy in a highly competitive market. It’s probably better to wait until buying up any shares.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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