When it comes to investing in high-tech stocks, you need to
catch companies at the right phase of their growth spurt. Major
profits were made in companies like
Cisco Systems (Nasdaq:
while they were still being introduced to fresh new waves of
investors. By the time they were widely-known, they became
"dead-money" stocks, moving sideways for years to come.
Even if you can
these high-growth stocks in the early phases of their life cycle,
it can still be hard to assess whether signs of robust growth are
just a short-term event or the beginning of a sustained longer
phase of growth.
I've been tracking a fast-growing data storage company that has the
makings of a solid profitable multi-year investment. In my view,
it's the early innings.
I'm talking about
, which didn't even land its first customer until 2008. The company
initially had a hard time convincing customers of its unusual
approach to data storage. While many rivals were pushing data
storage solutions based on hard drives, this company insisted that
flash memory was the way to go. This type of memory is both more
reliable and faster, but it's also more expensive than traditional
hard drive-based approaches.
No matter how impressive your technology may be, you still need
someone to take a chance on your unproven technology. Luckily for
were quite impressed and quickly signed up as customers. That
helped this company post remarkable growth.
When I first came across this company back in October, 2011,
that Fusion-IO may soon be short-circuited by rising competition.
eventually proved correct as
tumbled over the winter, I took a fresh look three
and came away much more impressed. My view about competition hadn't
changed. Instead, I saw this
niche as sufficiently large to boost the fortunes of all the major
view has now been validated. Shares are up more than 28% as of the
time of writing on Friday, August 10. And whereas I saw 50% upside
when this stock was just below $20, I still see 50% upside for this
stock even after Friday's spike into the mid-$20s. In a nutshell,
the long-term outlook is even brighter than I thought.
Analysts at Credit Suisse just noted in their review of June
quarter results, "the company is demonstrating, through solid
execution, that concerns over competition/GM fade are overblown."
The GM in that comment refers to gross margins. Rising competition
often leads a technology vendor to make pricing concessions. Yet
the fact that Fusion-io delivered 57% gross margins in its fiscal
fourth quarter (ended June) shows that revenue growth is not the
result of price-cutting to win deals. And management expects gross
margins to stay in that range throughout the current
that just began last month as well.
Equally important, Fusion-io has landed a range of new partners
and customers in the past three months (which you can read about in
the company's press release), which management believes will
$520-540 million in sales in fiscal (June) 2013. That's higher than
the current $479 million consensus forecast, and represents nearly
50% growth from the just-completed fiscal year. Looking further
out, analysts at Goldman Sachs see sales exceeding $650 million in
fiscal 2014 and approaching $800 million in fiscal 2015.
What price for growth?
Valuing a fast-growing tech stock is often a challenge. These
companies typically invest heavily for future growth and, as a
result, impede near-term
targets. Credit Suisse suggests that the price-to-sales ratio is a
better gauge, and by that metric, see shares nearly doubling from
current levels to $50.
Capital have a more modest $35
. Their bullishness stems from the fact that both
are now selling Fusion-IO's storage devices on a private label
basis, and also the fact that the company has 150 internal sales
reps that are just now gaining traction.
Risks to Consider:
Some analysts question whether shares will rally much further
until the company can show signs of solid bottom-line momentum as
well. Fusion-io is unlikely to earn $1 a share before fiscal 2015,
which is why Goldman Sachs is sticking with a $28 price target,
representing only modest upside.
Action to Take -->
Most technology analysts focus on sales growth and gross margins.
As technology companies mature,
dollars can grow a lot more quickly than
, so as long as this company can keep showing the solid sales
as we just saw in the June quarter, then you can anticipate further
upside ahead for this stock. Credit Suisse's $50 price target is
surely a bull-market valuation -- and I have my doubts about this
market. So I see this stock topping out as it moves toward the $40
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO, MSFT in one or more if its "real money"
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