The investing legend Ralph Wanger once shared a simple way to generate big returns: "If you're looking for a home run -- a great investment for five years or 10 years or more -- then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge."
That approach worked out quite nicely for Wanger. During his tenure as lead manager of the Acorn Fund from 1977 to 2003, he delivered annualized returns of 16.3% versus 12.1% for the S&P over the same time frame.
We think we've found an outstanding business that is poised to benefit from a massive long-term trend. The company is Fusion-io (NYSE: FIO ) , a disruptive data-storage innovator that will benefit from the revolution in big data. This company fits Wanger's model perfectly, and is one reason why we're buying the stock for our 10-Bagger portfolio.
The trends are our friends
We live in a digital world -- and we're not going back. The amount of data we use is staggering. According to a report by Cisco, the world generated 20 exabytes of data per month in 2010 (1 exabyte = 1,000,000,000 gigabytes). Cisco expects that number to grow 32% per year to more than 81 exabytes per month in 2015.
It's a good thing that storage costs continue to fall on a dollars-per-gigabyte basis. Otherwise it would be incredibly expensive to store all that information.
Cisco also expects 61% of consumer Internet traffic in 2015 (just under 60 exabytes per month) to be streaming video. That's why Netflix (Nasdaq: NFLX ) has been pushing Amazon.com, its data host, to adopt solid-state storage technology. Netflix wants to makes sure its customers get their videos without interruption.
Building a better mousetrap
Fusion-io is using those trends to its advantage. The company combines solid-state memory (versus mechanical memory like spinning hard drives) with proprietary software to help servers process information more effectively. With better processor utilization, businesses can now use fewer servers to process massive -- and growing -- amounts of data.
The key to more effective processing is balance. Think of its flash memory layer like a just-in-time manufacturing process. As long as stations aren't waiting for parts, an assembly line works efficiently. The same is true in the server rooms -- and Fusion-io is making sure data arrives on-time to keep the processors humming along.
Apple (Nasdaq: AAPL ) and Facebook recognized the benefits of Fusion-io's wares, putting its products into their servers. It's easy to understand why. Apple wants to provide a good experience for customers using iCloud and Siri going forward, so processing data quickly will keep Apple fans happy. And the amount of data Facebook users generate is staggering. In 2009, the social media giant collected 2.5 petabytes (1,000,000 gigabytes) of data. Today, that number is even larger. The faster and more effectively Facebook can use that data, the more opportunities it will have to generate revenue growth.
Monkey see, monkey do
Word of the benefits is spreading rapidly. Fusion-io continues to sign up new customers. Its latest is salesforce.com (NYSE: CRM ) . The cloud-based customer resource management provider can stay a step ahead of its competition by helping customers get the most out of the data they collect. And this will ultimately have a favorable knock-on effect. More customers will want to adopt Fusion-io's solution in order not to get left behind.
Alas, that creates a problem. It attracts competition.
In fact, EMC (NYSE: EMC ) , the storage giant, has developed a server-side flash memory solution called VFCache. While Fusion-io has a first-mover advantage and doesn't have the extra baggage of legacy storage systems, EMC is a formidable foe that shouldn't be underestimated.
We should never forget that disruptors can be disrupted in the technology world. Other young companies with big dreams like Violin Memory and Texas Memory Systems want to capture market share, too. That's why I am glad to see R&D spending staying near 14% of sales, even as sales increase. Fusion-io cannot take its foot off the new product development gas pedal. It has to work hard to protect and grow its position in the space.
The Foolish bottom line
The future looks bright for Fusion-io. It brought a disruptive technology to some early adopter customers and is gaining new ones as a result. With more than 9.5 million servers hitting the market in 2011, and more expected in 2012, there's ample room for growth as Fusion-io's technology gains acceptance. Growth will be the key and the company will have to work hard to maintain its competitive position. But today's price is worth nice starting position for such a promising company.
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