“Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies.” – Wikipedia
“Fission is a process where a large atomic nucleus (such as uranium) is split into two smaller particles.” – Wikipedia
Last week, Fusion-IO announced quarterly results that exceeded expectations for both revenue and earnings—and then it dropped a bomb. Revenue guidance for the next quarter was lowered to just $80 million and full year guidance was lowered to $420 – $440 million. The Street (and I) was looking for a whole lot better—as in nearly $100 million better on the full year. Management said that reduced expectations are due to 1) timing changes in orders from Apple and FaceBook, FIO’s two largest customers, and 2) improved efficiencies in its products that are allowing customers to delay (if not nix) additional purchases. While reason number one is disappointing, reason number two gives me a whole lot of concern.
Here’s what CEO David Flynn said on the topic in FIO’s conference call last week:
“The change in our guidance is the result of a shift in the timing of bulk purchases from our two key accounts, specifically for the next two quarters.
“When building out data centers, and expanding into new application areas, these customers have purchased in large volumes. They are now achieving greater efficiency thanks to our products, which has led to a shift in their near term demands. At the same time, they are now finding new applications, services, and data tiers in which to leverage our products.
“While our guidance reflects a cautious outlook in the balance between these two conflicting forces, over the past seven quarters, their orders have frequently exceeded our expectations, as they often move more quickly in developing new ways to add additional value using our solutions.
“Our key accounts are managing an exponential increase in data, while simultaneously managing their bottom line. These divergent business demands cause lumpy buying patterns that are indicative of a market going through a radical transformation.”
In other words, Apple and Facebook aren’t buying FIO’s products like they had been. I’ve now spoken with management regarding the radical change in the growth profile for FIO and they just haven’t provided any reassuring answers. We based our investment on high top-line, secular growth for FIO’s data storage technology, and it just isn’t playing out as I’d like to see.
I’ve said all along that FIO should be considered a venture capital type investment, and that it would either be a 10-bagger over the next ten years or we’ll sell it for a loss at some point. I’ve decided that right now is that point, at least in the near-term.
One of the most important lessons I have learned over the years is the importance of letting go of stocks when the fundamentals diverge from my expectations. Discipline above all else in our portfolio management is the key to continued outperformance.
We made some great money with FIO last year as the stock zoomed from less than $20 per share to more than $30 with our common and options trading. That said, we are now selling the remaining common at a loss. To reiterate, I’m partly basing the sell decision on the uninspiring answers I received in my own talks with management.
I’ve written before about the importance of knowing when to sell a loser, and that’s true for VC type investments too.
Today’s sell is simply a part of following the Revolution Investing playbook which continues to deliver fruits. That said, mea culpa.