Is Fusion-io the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Fusion-io (NYSE: FIO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

• Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
• Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
• Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
• Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
• Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
• Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Fusion-io.

Factor	What We Want to See	Actual	Pass or Fail?
Growth	5-Year Annual Revenue Growth > 15%	NM	NM
�	1-Year Revenue Growth > 12%	260.3%	Pass
Margins	Gross Margin > 35%	58.2%	Pass
�	Net Margin > 15%	4.8%	Fail
Balance Sheet	Debt to Equity < 50%	0%	Pass
�	Current Ratio > 1.3	9.63	Pass
Opportunities	Return on Equity > 15%	6.1%	Fail
Valuation	Normalized P/E < 20	276.03	Fail
Dividends	Current Yield > 2%	0%	Fail
�	5-Year Dividend Growth > 10%	0%	Fail
�	�	�	�
�	Total Score	�	4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Fusion-io has only had meaningful revenue for two years. Total score = number of passes.

With four points, Fusion-io has some work to do to reach perfection. However, the company is in a prime position to capitalize on a growing trend in technology.

Fusion-io makes solid-state memory devices. Solid-state memory has gained in popularity alongside their applications for tablets and other devices for which space is at a premium.

But Fusion-io's products are designed more for the high end, with a massive 10-terabyte drive that is several orders of magnitude faster to access than standard drives. For now, that gives Fusion-io a huge competitive edge over Western Digital and Seagate (Nasdaq: STX  ) -- at least for the highest-end applications. The company counts Facebook as its biggest customer.

But competition will be fierce going forward. Western Digital and Seagate have gotten into solid-state drives and have seen some promise, and peer OCZ Technology (Nasdaq: OCZ  ) saw a similarly impressive jump in revenue in its most recent quarter. EMC (NYSE: EMC  ) has also recently announced its new VFCache technology, using flash chips to accelerate performance.

Late last week, Fusion-io shares jumped sharply as speculation arose that Intel (Nasdaq: INTC  ) might seek to buy out the company. Fool contributor Evan Niu questioned whether at its sky-high valuation expecting a buyout at an even richer premium was realistic. A buyout may be the best exit strategy for investors, but for now, the stock is already priced for perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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