What's Dragging on Fusion-IO (FIO)?

NEW YORK (TheStreet) -- Fusion-IO (FIO) hasn't had a great 2013. The technology company has said goodbye to its CFO and sales chief, seen numerous ratings cuts from investment firms, and reported several quarters of disappointing guidance. Since January, the stock has tumbled 58.6%.

To add to its woes, on Tuesday UBS downgraded Fusion-IO to "neutral" from "buy," and slashed its price target to $11 from $15 in the process.

"Following the management change, we had thought the stock price decline discounted Fusion's challenges, but that proved incorrect," said analyst Steven Milunovich in the report. "We worry the window for Fusion to succeed is closing."

UBS said Fusion's foothold in PCI card production is slipping as new rivals emerge and that redeveloping any product will take another six to nine months to pay off.

"PCI cards have a place, but larger vendors such as EMC  (EMC) and Western Digital (WD) ... can drive margins down, perhaps below the low-50s gross margin that Fusion currently is projecting," wrote Milunovich.

Erasing some of the uncertainty surrounding Fusion's future, the Salt Lake City-based business has hired Ian Whiting as its sales chief. Whiting will leave a similar role at networking equipment maker Riverbed (RVBD) for the position. The company is still searching for a replacement CFO.

By mid-afternoon, Fusion shares had tumbled 5.3% to $9.48.

TheStreet Ratings team rates Fusion-IO Inc as a Sell with a ratings score of D. The team has this to say about their recommendation:

"We rate Fusion-IO Inc (FIO) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Computers & Peripherals industry. The net income has significantly decreased by 809.3% when compared to the same quarter one year ago, falling from $3.93 million to -$27.9 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Computers & Peripherals industry and the overall market, Fusion-IO Inc's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to -$17.15 million or 159.81% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 59.12%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 800% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • Fusion-IO Inc has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, Fusion-IO Inc reported poor results of -39 cents a share vs. -8 cents a share in the prior year. This year, the market expects an improvement in earnings (-30 cents vs. -39 cents).
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