This High-Growth Tech Stock Could Gain 50%

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Whenever you short a stock, there's always one huge risk: that your fellow short-sellers will get spooked, buy to cover their positions and unwittingly push the stock up. Indeed, that's what appears to have happened in the days after I predicted a big pullback (and shorting opportunity) in shares of data-storage firm Fusion-io (NYSE: FIO )

The stock had a huge surge, making my call look pretty lame. But eventually, reality set in. 

With shares now down more than a third since my bearish take (while the S&P 500 has risen 5% since then), I've been looking at this stock again to see  if even more downside lies ahead. Yet my research has revealed a different conclusion. At $20 a share, and with many of the early hurdles now behind this stock, I see a lot more upside than downside in the quarters ahead. 

As a quick recap, Fusion-io has developed state-of-the-art data-storage solutions using solid state devices, which are faster, more reliable and use less power than traditional hard-disk drives. Vast troves of data can be accessed very quickly, which is crucial for companies that want and need a fast website, for instance. That's why Facebook (NYSE: FB ) , Apple (Nasdaq: AAPL ) , Pandora (NYSE: P ) , and Hewlett-Packard (NYSE: HPQ ) now rank among Fusion-io's top customers. The company has nearly a dozen patents and roughly 80 patents pending.

For a company that has only been around since 2006, growth has been meteoric.  Sales hit $82 million in 2010, surged to $297 million last year and could exceed $500 million by next year.

But Fusion-io has a major problem, which is the key factor behind the stock pullback. Though the company had a considerable head start with its technology, competitors are fighting back fiercely. EMC (NYSE: EMC ) , for example, has a made a series of acquisitions and is expected to eventually take some market share in this space. 

Yet this industry opportunity is so large -- a few analysts say demand for these speedy storage devices could grow 50% annually in coming years -- that Fusion-io is bound to grow nicely, even as its total market share shrinks. The key difference between my bearish view last fall and my current more bullish view:  I now think the competitive fears, while quite real, won't stop Fusion-io from retaining its status as one of the leading vendors in this space.

For a stock like this, it's all about positive and negative catalysts. Let's review them, starting with the negatives:

•  This company went public in June 2011, and after the 180-day lock-up expiration date arrived, massive amounts of new stock hit the market . This negative catalyst is now out of the way.

•  Investors anticipated product development announcements from rivals, which had pressured shares. But now that those plans have been disseminated in the market, fears are receding that Fusion-io's technology will be leapfrogged. As things stand now, this company is still the benchmark others must follow.

The positives:

•  Key partners such as Hewlett-Packard and IBM (NYSE: IBM ) have been testing the company's new ioDrive2, which is considerably more robust than the prior version. "Demand for Fusion-io's products continues to exceed our expectations, and momentum could improve further, once OEMs qualify the new ioDrive2 late this quarter," note analysts at Goldman Sachs, who have a $30 price target . This drive is expected to extend Fusion io's technology lead.

•  Key customers such as Facebook and Apple are still in the process of beefing up their server networks and are expected to keep placing fairly hefty orders with Fusion-io.

•  Funds raised in the IPO are now fueling international expansion. China, for example, is shaping up to be a fast-growing market for the company.

•  This is the most rapidly-consolidating industry in high-tech. Young companies with solid technology and a well-regarded customer base have been continually snapped up by the likes of Dell (Nasdaq: DELL ) , HP and others.  With shares now more than 50% off the 52-week high , merger and acquisition chatter may build.

Risks to Consider: There are some concerns that a deeper economic slowdown in Europe and in the United States may lead to a pullback in tech spending, as chief information officers (CIOs) elect to save rather than spend their allotted budgets.  

Action to Take -->  Since touching $29 in late April, this stock is now below $20. With solid projected growth in the years ahead, such short sudden pullbacks are often a window for investors who like GARP (growth at a reasonable price) stocks. And Fusion-io has swiftly moved into this category. Once the positive catalysts kick in, shares could move back toward the $30 mark (a 50% gain), though it would take a scorching bull market for this stock to re-visit the 52-week high of $41.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas
Referenced Symbols: AAPL , FB , FIO , HPQ , P

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