Violin Memory (VMEM), which is a top player in the Flash-based storage market, issued 18 million shares at $9 each this morning — the midpoint of the $8 to $10 range.
That pricing proved to be too optimistic, though, as the stock plunged 16% in early trading today.
Violin Memory “pioneered a new class of persistent memory-based storage solutions designed to bring storage performance in line with high-speed applications, servers and networks.” Essentially, its technology is better and cheaper than traditional disk-based systems for the most part, especially when it comes to powering data intensive applications like the cloud or Big Data.
As a result, 250 enterprises have implemented Violin’s technologies across the financial services, Internet, government, media and telecommunications industries. Violin Memory also has both a direct sales force and a global network of more than 100 resellers and partners like Dell (DELL), Fujitsu (FJTSY), IBM (IBM), Microsoft (MSFT), SAP (SAP), Toshiba (TOSYY) and VMware (VMW).
So Violin Memory has seen tremendous growth with its sales. During the past three years, revenue soared from $11.4 million to $73.8 million. But the losses have also been growing at a rapid clip, going from $16.7 million to a whopping $109.1 million over the same time period.
The bottom line: Violin Memory really needs the $162 million from its public offering.
Of course, it will probably need some more considering the company is facing some tough challenges. Let’s take a look at three of them:
Competition: The high-end storage market is crowded with rivals, such as Dell, EMC (EMC), Hewlett-Packard (HPQ), IBM, Oracle (ORCL) and NetApp (NTAP). There are also a spate of venture-backed startups gunning for the market opportunity. According to the S-1:
“Competitive factors could make it more difficult for us to sell our products, resulting in increased pricing pressure, reduced gross margins, increased sales and marketing expenses, longer customer sales cycles and failure to increase, or the loss of, market share, any of which could seriously harm our business, operating results and financial condition.”
Customer Concentration: Flash memory is not cheap and only a limited number of buyers need the technology. Consider that five of Violin’s customers account for 37% of total revenues. As a result, losing just one customer can wreak havoc — a reality that hit hard last year when HP terminated its reseller agreement. The company’s share of overall revenues plunged from 65% to under 10%.
Fusion-io: Fusion-io (FIO) was the last Flash operator to come public — a deal that took place back in June 2011. At first, the performance was fairly strong and the stock quickly hit $40 after selling for only $19 each … but that run turned out to be temporary. Since then, the company has posted volatile earning, saw the departure of its CEO shares have slid to under $14.
In light of all this, it is reasonable that Wall Street is wary of this IPO — and actually amazing that the company was able to pull off the deal.
Going forward, though, Violin Memory will need to deal with some tough issues and may even need another slug of capital. So for investors, it’s probably best to avoid the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All 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.