Is Fusion-io the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Fusion-io (NYS: FIO) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Fusion-io.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%NMNM
 1-Year Revenue Growth > 12%260.3%Pass
MarginsGross Margin > 35%58.2%Pass
 Net Margin > 15%4.8%Fail
Balance SheetDebt to Equity < 50%0%Pass
 Current Ratio > 1.39.63Pass
OpportunitiesReturn on Equity > 15%6.1%Fail
ValuationNormalized P/E < 20276.03Fail
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Fusion-io has only had meaningful revenue for two years. Total score = number of passes.

With four points, Fusion-io has some work to do to reach perfection. However, the company is in a prime position to capitalize on a growing trend in technology.

Fusion-io makes solid-state memory devices. Solid-state memory has gained in popularity alongside their applications for tablets and other devices for which space is at a premium.

But Fusion-io's products are designed more for the high end, with a massive 10-terabyte drive that is several orders of magnitude faster to access than standard drives. For now, that gives Fusion-io a huge competitive edge over Western Digital and Seagate (NAS: STX) -- at least for the highest-end applications. The company counts Facebook as its biggest customer.

But competition will be fierce going forward. Western Digital and Seagate have gotten into solid-state drives and have seen some promise, and peer OCZ Technology (NAS: OCZ) saw a similarly impressive jump in revenue in its most recent quarter. EMC (NYS: EMC) has also recently announced its new VFCache technology, using flash chips to accelerate performance.

Late last week, Fusion-io shares jumped sharply as speculation arose that Intel (NAS: INTC) might seek to buy out the company. Fool contributor Evan Niu questioned whether at its sky-high valuation expecting a buyout at an even richer premium was realistic. A buyout may be the best exit strategy for investors, but for now, the stock is already priced for perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Fusion-io may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click hereto add Fusion-io to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of EMC, Western Digital, and Intel. Motley Fool newsletter services have recommended buying shares of Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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