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
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
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.
Monkey see, monkey do
Word of the benefits is spreading rapidly. Fusion-io continues to sign up new customers. Its latest is salesforce.com
Alas, that creates a problem. It attracts competition.
In fact, EMC
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.