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
of data-storage firm
The stock had a huge surge, making my
look pretty lame. But eventually, reality set in.
With shares now down more than a third since my
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
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.
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
, for example, has a made a series of acquisitions and is expected
to eventually take some
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
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
arrived, massive amounts of new stock hit the
. This negative
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
others must follow.
• Key partners such as Hewlett-Packard and
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
. 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
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
, HP and others. With shares now more than 50% off the
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
(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
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.
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