Whenever you short a stock, there’s always one huge risk: that your fellow short-sellers will get spooked, buy to cover their positions and unwittingly push the stock up. Indeed, that’s what appears to have happened in the days after I predicted a big pullback (and shorting opportunity) in shares of data-storage firm Fusion-io (NYSE: FIO). 

The stock had a huge surge, making my call look pretty lame. But eventually, reality set in. 

With shares now down more than a third since my bearish take (while the S&P 500 has risen 5% since then), I’ve been looking at this stock again to see  if even more downside lies ahead. Yet my research has revealed a different conclusion. At $20 a share, and with many of the early hurdles now behind this stock, I see a lot more upside than downside in the quarters ahead. 

As a quick recap, Fusion-io has developed state-of-the-art data-storage solutions using solid state devices, which are faster, more reliable and use less power than traditional hard-disk drives. Vast troves of data can be accessed very quickly, which is crucial for companies that want and need a fast website, for instance. That’s why Facebook (NYSE: FB), Apple (Nasdaq: AAPL), Pandora (NYSE: P), and Hewlett-Packard (NYSE: HPQ) now rank among Fusion-io’s top customers. The company has nearly a dozen patents and roughly 80 patents pending.

For a company that has only been around since 2006, growth has been meteoric.  Sales hit $82 million in 2010, surged to $297 million last year and could exceed $500 million by next year.

But Fusion-io has a major problem, which is the key factor behind the stock pullback. Though the company had a considerable head start with its technology, competitors are fighting back fiercely. EMC (NYSE: EMC), for example, has a made a series of acquisitions and is expected to eventually take some market share in this space. 

Yet this industry opportunity is so large — a few analysts say demand for these speedy storage devices could grow 50% annually in coming years — that Fusion-io is bound to grow nicely, even as its total market share shrinks. The key difference between my bearish view last fall and my current more bullish view:  I now think the competitive fears, while quite real, won’t stop Fusion-io from retaining its status as one of the leading vendors in this space.

For a stock like this, it’s all about positive and negative catalysts. Let’s review them, starting with the negatives:

• This company went public in June 2011, and after the 180-day lock-up expiration date arrived, massive amounts of new stock hit the market. This negative catalyst is now out of the way.

• Investors anticipated product development announcements from rivals, which had pressured shares. But now that those plans have been disseminated in the market, fears are receding that Fusion-io’s technology will be leapfrogged. As things stand now, this company is still the benchmark others must follow.

The positives:

• Key partners such as Hewlett-Packard and IBM (NYSE: IBM) have been testing the company’s new ioDrive2, which is considerably more robust than the prior version. “Demand for Fusion-io’s products continues to exceed our expectations, and momentum could improve further, once OEMs qualify the new ioDrive2 late this quarter,” note analysts at Goldman Sachs, who have a $30 price target. This drive is expected to extend Fusion io’s technology lead.

• Key customers such as Facebook and Apple are still in the process of beefing up their server networks and are expected to keep placing fairly hefty orders with Fusion-io.

• Funds raised in the IPO are now fueling international expansion. China, for example, is shaping up to be a fast-growing market for the company.

• This is the most rapidly-consolidating industry in high-tech. Young companies with solid technology and a well-regarded customer base have been continually snapped up by the likes of Dell (Nasdaq: DELL), HP and others.  With shares now more than 50% off the 52-week high, merger and acquisition chatter may build.

Risks to Consider: There are some concerns that a deeper economic slowdown in Europe and in the United States may lead to a pullback in tech spending, as chief information officers (CIOs) elect to save rather than spend their allotted budgets.  

Action to Take –>  Since touching $29 in late April, this stock is now below $20. With solid projected growth in the years ahead, such short sudden pullbacks are often a window for investors who like GARP (growth at a reasonable price) stocks. And Fusion-io has swiftly moved into this category. Once the positive catalysts kick in, shares could move back toward the $30 mark (a 50% gain), though it would take a scorching bull market for this stock to re-visit the 52-week high of $41.