Has Fusion-io Become the Perfect Stock?
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 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? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 333.1% | Pass |
1-year revenue growth > 12% | 47.8% | Pass | |
Margins | Gross margin > 35% | 58% | Pass |
Net margin > 15% | (0.3%) | Fail | |
Balance sheet | Debt to equity < 50% | 0% | Pass |
Current ratio > 1.3 | 7.24 | Pass | |
Opportunities | Return on equity > 15% | (0.3%) | Fail |
Valuation | Normalized P/E < 20 | 156.53 | Fail |
Dividends | Current yield > 2% | 0% | Fail |
5-year dividend growth > 10% | 0% | Fail | |
Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Fusion-io last year, the company gained a point as it established a nearly five-year track record of growth. But shares haven't been so lucky, losing nearly half their value over the past year.
Fusion-io has taken the data storage industry by storm. With its focus on flash memory and solid-state storage, Fusion-io is taking aim at old-style hard-disk drive makers, seeking to provide better speed and functionality to enterprise customers.
But one major problem that Fusion-io has is that its products are apparently too good. At the end of January, Fusion-io said that revenue for its fiscal third quarter would come in more than 40% below where analysts had expected, with the full-year 2013 shortfall amounting to as much as $100 million. The company said that timing of purchases from its two main customers, Facebook and Apple , would push back future sales. Facebook and Apple both rely heavily on Fusion-io, together accounting for half of Fusion-io's revenue, but if their data centers work so well that they won't need further orders from the flash-memory technology provider, then Apple's and Facebook's gain is Fusion-io's loss.
Fusion-io also faces competitive threats. Rather than accepting obsolescence, hard-drive maker Seagate Technology has been rumored to be looking at buying Fusion-io rivalOCZ Technology , which is also a solid-state drive maker. The combination could force Fusion-io to find its own partner or else face a behemoth competitor that could potentially crush it with its industry relationships.
For Fusion-io to improve, it needs to take its revenue gains and convert them into profits. That's a tall order in a highly competitive market, but it's absolutely necessary if Fusion-io has aspirations to become a perfect stock.
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.
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The article Has Fusion-io Become the Perfect Stock? originally appeared on Fool.com.
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