What’s Weighing On Fusion-io Shares?

Shares of enterprise solid-state provider Fusion-io ($FIO) continue to sink and shares are down 21.7% in the last month alone.

So what information is driving this huge drop?  I think there are two negative catalysts weighing on $FIO:

1) Insider Selling

When lockup periods expire on new IPOs, venture capitalists and early investors typically scale back their position by selling their existing shares. Companies invest significant amounts of capital in early-stage companies with the hope that these upstarts will eventually go public.

Of course, when a company like $FIO crosses the finish line and goes public, there is a big pay day involved for the venture capitalists.


This phenomenon is particular true for Fusion-io ($FIO), since NEA Management Company, LLC owned a 31.1% share in the company as of 9/30/11.

When the lockup period expired, a significant amount of NEA insiders sold their existing positions in $FIO, which drove shares lower.

Is this a cause for concern? Absolutely not.  It’s fairly common for venture capitalists to scale back their positions once their companies eventually go public.  For example, Bain Capital recently sold their entire stake on social networking provider LinkedIn ($LNKD) when the lockup period expired.

2) Analyst Commentary

Another datapoint that is weight on $FIO is some speculation from a prominent investment bank.

Recent analyst commentary from Lazard, which suggested that $FIO faces increased competition from $MU and $OCZ, caused shares of $FIO to plunge yesterday.

While all of this insider selling puts pressure on $FIO shares in the short-term, I don’t think these insider transactions can be viewed any negative signal about the company’s long-term future.



The analyst went on to suggest that $FIO ‘s strong relationship with Facebook could eventually crumble as new competitors enter the marketplace.

I’m not going to mince words here: this analyst is completely wrong and off-base. The fact that he’s suggesting $OCZ could steal share from $FIO shows his total lack of understanding when it comes to the enterprise SSD market.

That’s like trying to suggest that KIA is going to steal market share from BMW.

While the two companies both produce SSDs, Fusion-IO and OCZ make completely different products for completely different customers.

$OCZ sells a significant amount of their drives to consumers through low-margin retail channels like Amazon.com or Newegg.com. $OCZ drives have a history of glaring quality issues, which is a huge deal breaker for enterprise customers in a fail-safe environment.

On the other hand, $FIO has cultivated close business relationships with a lot of the top tech companies like Apple and Facebook. $FIO ‘s drives are better than anything out there on the market, which is the reason why they collect such a huge amount of margin compared to their competition.

In short, I think you have to take what these Wall Street analysts take with a grain of salt. I can say that with confidence because I have worked in the industry and I am very familiar with the enterprise SSD market.

You always have to take what the Wall Street analysts say with a grain of salt… for example:

I’m personally looking at this as a great buying opportunity and I maintain that $FIO has a bright future. The company is similar to Apple in a sense that they have a 2-3 year lead over their competition.

I maintain that $FIO is a buy.

Disclosure: Long position in $FIO

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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