Fusion-io: The Street Ignores the Good

NEW YORK (TheStreet) -- Since bottoming out at $10.38 per share on Aug. 21, shares of Fusion-io (FIO), which have been under significant pressure for most of the year, have soared by as much as 50%. Due to the volatile nature of this company over the past month, the stock has given back more than 10% of those gains.

In the ever-changing realm of Big Data, where titans like EMC ( EMC) and NetApp ( NTAP) have grown to dominate corporate enterprises, Fusion-io is still a relatively unknown name. However, it is starting to disrupt the way enterprises think about storage and analytics. To that end, while there's no debate that Fusion-io has extraordinary growth potential, management has chronically failed to execute on that promise. I don't believe it's time to give up on this company just yet, even though the Street is expecting very little.

Despite what has been considered a brutal performance by many investors, Fusion-io has posted a 21% sequential jump in revenue for its recent quarter. While it's true that there was a year-over-year fall 1% in revenue, the results form EMC and NetApp didn't suggest that corporate enterprises were ready to loosen their purse strings. Plus, it's worth noting here that the company continues to benefit greatly from its relationship with Facebook ( FB), which now accounts for more than one-third of Fusion-io's sales.

The Street still seems disappointed with the company's profit margins. That, too, is something that I can't quite understand. I will grant that Fusion-io's profitability hasn't been extraordinary, but it seems pointless to act as if profits suddenly matter to a company that is less than two years old and is still experiencing some growth spurts.

In that regard, the fact that sales and marketing expenses climbed more than 50% should not have come as a surprise. Even so, the company still managed to beat its gross margin expectations by roughly 1%. The only issue with this quarter was with the company's guidance, which was 31% below expectations. Management guided revenue for $85 million versus Street estimates of $124 million.

I'm not going to pretend that the disparity gap is not significant because we also have to consider what message management is trying to send. Given the Street's existing fear over the company's growth, why set the company up to fail when enterprise spending is clearly still sputtering? I agree with this strategy.

It's anyone's guess when the government shutdown will be lifted. Until then, companies on which Fusion-io relies for its revenue, are going to taper their own IT investments. So I'm not buying into the idea that Fusion-io is being conservative because it is unable to compete against, say, IBM ( IBM), whose storage business has been in a perpetual decline.

Fusion-io, which is now under new leadership, wants to establish a different platform or operating standard for the company. One of the ways to do that is by setting the bar to more realistic expectations -- and I don't believe that this is a situation where new management is discrediting the company's own products and services.

While the outgoing management team was more brash about what the company is able to do, the "new Fusion-io" seems to be in more mature hands. For a growth company that's fighting for market share in an increasingly mature environment, led by EMC and IBM, I believe this is the best course to take.

There are still questions about the company's long-term growth potential in a highly competitive environment, no doubt, but I'm still modeling for increased revenue to come from some of Fusion-io's largest customers. Some of these include Apple ( AAPL) and Salesforce.com ( CRM). The company also has strategic partnerships in place with Cisco ( CSCO) (among others) as it looks for ways to spur more growth.

I understand there are no guarantees, particularly as IBM and EMC lurk in the background with piles of cash and resources. But for a company that is still posting better than 20% revenue growth, this stock still looks undervalued, and with continued free-cash-flow improvement, these shares should trade between $15 and $18 per share in the next 12 months.

At the time of publication, the author held shares of Apple.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

More from Opinion

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?