Why Violin Memory, Inc. Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Violin Memory (NYSE: VMEM  )  surged by 21% Thursday after the high-speed data storage specialist appeased nervous investors with an encouraging business update. In addition, news broke that activist investor Clinton Group is urging Violin's board to sell the company.

The news also comes on the heels of a more than 20% pop earlier this week following the ouster of Violin CEO Don Basile.

So what: In the report, Violin insisted it remains on track to release several major product offerings in early 2014, which should strengthen its position. What's more, Violin reiterated its long-term financial expectations, including gross margin between 58% and 62%, and operating margin between 14% and 16%. Finally, Violin announced it expects to achieve profitability in 2015.

If that weren't enough, activist investor Clinton Group has also penned a letter urging Violin Memory's board to pursue a sale of the company. Specifically, Clinton Group estimates a number of buyers would likely be willing to acquire Violin at an approximate enterprise value of $400 to $500 million, or roughly $6 to $7 per share.

Now what: That would represent a solid gain from today's close at $4.23 per share, but note that even the high end of Clinton Group's suggested range is still significantly below Violin Memory's $9 IPO price back in September, and in line with its first-day close.

With this in mind, unless Violin is truly nervous about its potential -- which would run contrary to today's business update -- I wouldn't count on an acquisition happening in the near future. Once again, before I'll consider opening a position myself, I will need more tangible evidence that Violin's top-line growth and long-term vision will actually materialize.

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9/30/2016 4:02 PM
VMEM $0.73 Down -0.01 -1.47%
Violin Memory CAPS Rating: *