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Buy, Sell, or Hold: Fusion-io

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Fusion-io (NYSE: FIO  ) today, and see why you might want to buy, sell, or hold it.

Founded in 2005 and based in Salt Lake City, Utah, Fusion-io sports a market capitalization of about $2.4 billion. It specializes in storage memory platforms for businesses (think flash memory and solid-state drives), with its hardware and software offerings helping decentralize data in markets such as financial services, Internet, technology, education, retail, manufacturing, energy, life sciences, and government. Its distribution channels include direct sales and original equipment manufacturers.

Once you see that Fusion-io is involved in memory, that might be enough to pique your interest, as the machines that we and businesses depend on require more and more of it over time. Better still, costs are falling for flash memory, as solid-state drives become more attractive relative to the traditional storage offerings of companies such as Western Digital (Nasdaq: WDC  ) and Seagate Technology (Nasdaq: STX  ) . (Both Western Digital and Seagate have added SSDs to their line-ups, as well.)

Fusion-io's position in its market is also a plus, as it's already a major player, with its wares in servers sold by little outfits you may have heard of, such as Cisco Systems, IBM, Dell, and Hewlett-Packard.

Next, the "Big Data" market is a most promising one, expected to grow by more than 40% annually, from $3 billion in 2010 to $20 billion by 2015. Fusion-io currently holds a big piece of a rapidly growing pie.

Meanwhile, though Fusion-io remains unprofitable at this point (like many young, dynamic growers in their early years), plenty of other numbers bode well for it. Its annual revenue has been growing briskly, from $10 million in 2009 to $359 million recently. Net income is getting close to positive territory, and free cash flow has turned from negative to positive.

Bullishness over Fusion-io has been growing, with the stock's rating in our CAPS community of investors rising from two to four stars (out of five) in recent months.

One green flag for Fusion-io is also a red flag: It sports some very significant customers, such as Facebook and Apple, as it makes Facebook's massive data centers and Apple's iCloud services more efficient. Very impressive, right? But those two customers recently accounted for more than half of Fusion-io's revenue, which is a risky situation. Should one of those partnerships break down, it will have a big effect on Fusion-io's top and bottom lines. Fusion-io isn't sitting still, though -- it has been adding new customers, such as Cisco, which came on board this past summer.

Other downsides include the facts that Fusion-io faces significant competition, and that the market is very price-sensitive, meaning that customers will generally seek out the best values. Storage giant EMC (NYSE: EMC  ) is a deep-pocketed competitor, with a market capitalization nearly 20 times that of Fusion-io. It owns most of virtualization specialist VMWare (NYSE: VMW  ) and has introduced its competing VFCache technology. Some think that EMC might do well to just acquire Fusion-io.

Though many numbers in the company's financial statements are exciting, one trend is not: Its shares outstanding have skyrocketed, from about 8 million in 2009 to around 90 million recently. Recent increases and projected further increases are more modest than past ones, though. Still, this bears watching, for current and prospective investors.

Some also worry about Fusion-io's limited patent protection, and commoditization of its offerings.

Finally, there's the stock's valuation. Its recent price-to-sales ratio of 6.7 and price-to-cash-flow ratio of 69 make it seem far from a bargain. If it keeps growing rapidly, though, the picture could change. Remember that some longtime growers, such as, have almost always seemed overvalued. Few companies will turn out to be of Amazon's caliber, though.

Hold (off)
Given the reasons to buy or sell Fusion-io, it's not unreasonable to decide to just hold off. You might want to wait for it to post a few profitable quarters, or for its free cash flow to grow more. You might also want to see it sign up even more big customers, and depend less on a few really big ones.

The verdict
I'm going to pass on Fusion-io at the moment, but I want to keep my eye on it. It might find its way into my portfolio, particularly if the stock falls significantly in value. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitterowns shares of Apple and The Motley Fool owns shares of Apple,, EMC, Facebook, Fusion-io, International Business Machines, VMware, and Western Digital and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple,, Dell, Facebook, International Business Machines, and VMware. 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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