As the Level of Worldwide Data Rises, So Will This Stock

Fusion-io  has been one of the most beaten down stocks in the market, off nearly 60% year to date, compared to the fact that the S&P 500 index is up more than 25% over the same period. It's now trading for less than $10 for the first time since its mid-2011 IPO. For deep value investors, this could be a great entry point.

The latest quarter put a real strain on the company, and one of the headwinds Fusion-io faced earlier this year included a slower ramp up in customer wins than expected. Not to mention the fact that the gross margin is expected to come in below 54% for fiscal 2014 compared to 60% in 2013.

FIO Chart

Fusion-io data by YCharts

The other major event that dampened investor sentiment was the announcement that the CFO and head of sales was leaving the company. This comes after the CEO and one of the co-founders both left the company back in May. The thing for investors to remember is that the weakness in the stock is temporary, and the long-term growth story remains to be told.

A turning point?
Never fear, despite those worries Fusion-io is still landing other major customers, helping to further diversify its revenue stream. Some of its big wins over the past year and a half have included the likes of, Alibaba, and China Mobile.

Fusion-io provides solutions to small- and medium-sized enterprises. Basically, it touts itself as a company that uses flash memory to increase datacenter efficiency. Its key customers include Dell, IBM, Cisco, and HP, where it helps these companies with data processing and management. Given the rapid rise in the amount of data that businesses are generating, it appears to be a good business to be in.

And although it's been quite a rocky 2013, the future is quite bright. Analysts expect earnings per share to grow at nearly 30% annually in the next five years. The company has no debt and more than 20% of its market cap is covered by cash on the balance sheet. The latest quarter showed the company is diversifying its revenue stream while also realigning its sales force.

As far as other major players in the flash space, Western Digital  announced earlier this year that it was snatching up Virident. The SSD vendor, Virident, was bought by Western for $685 million. Virident's core technology is very close to Fusion-io's; thus, a premium buyout by Western is a vote of confidence for Fusion-io's core products. And unlike Virident, Fusion-io has a much broader tech offering as well as an impressive customer base.

The other major player in the storage space is EMC . EMC is seeing positive sentiment among investors even with concerns surrounding government spending. This comes as there's little denial that cloud computing is a fast growing industry. EMC gets exposure to the cloud-computing industry via its ownership of VMWare. However, the rising level of higher video usage and record-keeping should continue driving EMC's core business higher. The rising demand in flash storage could even prompt EMC to snatch up Fusion-io.

Bottom line
Buy Fusion-io with upside to nearly $15, thanks to Fusion-io's impressive sales growth and slight multiple expansion. The data-storage-device industry trades at an enterprise value/sales multiple that's closer to 6.5 times. Fusion-io's 2.2 times multiple is well below this. A 3 times EV/sales on fiscal 2015 sales estimates suggests the stock could be trading 50% higher in less than 18 months.

Investors shouldn't underestimate the potential for a takeover either. Trading at a mere $860 million enterprise value, Fusion-io could easily be snatched up by one of the major tech giants, such as Intel, IBM, or Cisco in addition to EMC.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of EMC and Western Digital.. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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