Fusion-IO Has Growth Potential, But...

NEW YORK ( TheStreet) -- In the ever-changing world of "big data," a market currently dominated by IBM ( IBM) and EMC ( EMC), here comes Fusion-IO ( FIO), a relatively unknown company that is starting to disrupt the way enterprises think about storage and analytics.

While I do believe the company has incredible growth potential, I worry that macro headwinds may soon add some restraint to the incredibly high expectations its current valuation presumes. While the company deserves credit for having avoided these setbacks up to this point, I think it is prudent for investors to wonder how much longer that can last.

An Impressive First Quarter

For the period ending Sept. 30, the company reported net income of $3.9 million, or 4 cents per share, on revenue of $118.1 million. Sales surged almost 60% year over year and 11% sequentially, while also exceeding analysts' estimates by 7%. Although net income declined from the year-ago quarter, the company continues to do well in terms of profitability. Operating income surged upward by 79%, while gross margins also improve sequentially by two points to 59.5%, beating the company's own projections.

Improvements in margins was attributable to better product mix and cost improvements on its higher-configuration products. Likewise, expenses also showed considerable improvements, declining by 5% sequentially or saving the company slightly over $2 million. As a result, the company was able to generate 19.5% in operating margin.

Similarly, sales and marketing expenses declined during the quarter, coming in at $23 million and shedding almost $2 million sequentially.

Execution such as this would ordinarily be cause for celebration but the company's flat guidance for the second quarter didn't allow that to happen. Disappointment was the immediate reaction by investors. However, flat revenue projections still represent 40% year-over-year growth.

What's more, investors can expect increased revenue to come from some of the Fusion-IO's largest customers, which includes Apple ( AAPL), Salesforce.com ( CRM) and Facebook ( FB).

Moving Forward

Overall, this was an exceptional performance across the board although the resulting 14% drop in the stock did not reflect this. Investors decided it was best to take profits now as opposed to waiting for the tough macro-climate, which has hurt rivals such as IBM and EMC, to catch up with Fusion-IO. Nonetheless, the company's performance speaks to the quality of its management as well as its strong fundamentals.

How long it will be before the bigger rivals figure out a way to eat away at Fusion-IO margins? Evidence suggests the company has also wondered about this. To that end, it has forged partnerships with Cisco ( CSCO) and NetApp ( NTAP), hoping they will help produce the level of revenue needed to keep the growth momentum going.

Bottom Line

While I am bullish on the company here, I understand there are no guarantees, particularly as IBM and EMC lurk in the background with piles of cash and resources, enough to make a meaningful impact in Fusion-IO's momentum. Then again, if they could, they likely would have done so already.

Normally this is the part where I start talking about valuation and how expensive the stock is, but with a growth trajectory such as what Fusion-IO is on I just don't see a point in doing that here.

The company's value is in the way that it saves enterprises money while helping companies become more efficient. These are areas that very few companies can afford to ignore. Likewise, ignoring Fusion-IO and its growth potential may one day yield plenty of investor regret.

At the time of publication, the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.