One of my Picks Gained 28% in One Day… And it Could Still Gain 50%

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 Dell (Nasdaq: DELL), Cisco Systems (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT) 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 spot 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 Fusion-io (NYSE: FIO), 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 Fusion-io, both Apple (Nasdaq: AAPL) and Facebook (NYSE: FB) 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, I cautioned that Fusion-IO may soon be short-circuited by rising competition. Though that call eventually proved correct as shares tumbled over the winter, I took a fresh look three months ago and came away much more impressed. My view about competition hadn't changed. Instead, I saw this market niche as sufficiently large to boost the fortunes of all the major players concerned.

That bullish 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 fiscal year 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 yield $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 net profit 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.

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, gross profit dollars can grow a lot more quickly than operating expenses, so as long as this company can keep showing the solid sales growth and gross margin leverage 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 mark.