NEW YORK (CNN/Money) -
Sun Microsystems is finally basking in the warmth of some much-needed love from Wall Street.
The manufacturer of high-end servers for big businesses has been struggling for the past few years as companies have cut back on tech spending. The company reported a loss in its latest fiscal year, which ended in June, and analysts are predicting an even wider loss for fiscal 2004.
But this month, Banc of America Securities analyst Keith Bachman upgraded the stock and Merrill Lynch analyst Steve Milunovich, who has been one of the company's harshest critics, raised his revenue target for the company's fiscal second quarter.
Shares have shot up 23 percent during the first seven trading days of the year and are now just 3 percent off their 52-week high. And get a load of this. On Tuesday, a tough day for the overall market and techs in particular, Sun (SUNW: Research, Estimates) was the only one of the top ten most actively traded Nasdaq stocks to finish with a gain. What gives?
More choices are good for Sun...
This might be a good old-fashioned dead-cat bounce since Sun's fortunes haven't changed all that much in the past few months.
Sure, corporate tech spending appears to finally be on the upswing again. But analysts are predicting a 6 percent year-over-year revenue decline for the fiscal second quarter and a loss of 5 cents a share. Sun will report its latest results on Thursday.
"Overall capital spending, although improving, still has a way to go. And we're concerned about competitive pressures that IBM, Dell and Hewlett-Packard are putting on Sun," said Jay Wong, co-manager of the Payden U.S. Growth Leaders fund. Wong said the fund sold its position in Sun last year.
Sun has been hit harder than most other hardware companies --its stock is still more than 90 percent below its all-time peak price from the summer of 2000 -- because it stubbornly stuck to its guns even as customers were adopting new technological standards.
The company was slow to embrace the open-source Linux operating system, preferring to tout the virtues of its proprietary version of the Unix system known as Solaris. But by doing so, IBM, HP and Dell were able to gain share in the server market as the popularity of Linux increased. And Microsoft has made some inroads as more hardware companies sell servers based on its Windows operating system.
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Sun also pushed its own semiconductors, known as UltraSparc, while companies like IBM, Dell and HP relied more on chips from Intel and Advanced Micro Devices. But Sun has loosened up somewhat in recent months, which could be one reason for new optimism on Wall Street.
In November, Sun announced a partnership with AMD to sell servers using AMD's new 64-bit Opteron chips. Sun now also sells low-end servers using Intel chips. And Sun is finally offering Linux as well.
"Sun had been competing on too many fronts," said Michael Cohen, director of research for Pacific American Securities. "But what they've been doing lately is giving customers choice."
...but show me the sales
Still, it remains to be seen whether this choice will translate to increased sales. According to tech research firm IDC, Sun's server sales declined in the third quarter of 2003, even though overall sales increased industrywide. IBM and HP widened their market share lead over Sun and Dell is inching closer to Sun's third place spot in the server arena.
Cohen said Sun's fortunes probably did not change much in the latest quarter either, which makes its stock price move more mystifying. "This is an environment where everybody should be doing better. But I don't think there's much chance for an upside surprise out of Sun," Cohen said. He doesn't own the stock and his firm has no investment banking ties to Sun.
Sun's stock did enjoy a nice bounce last year as well, gaining 44 percent. But some of that was due to a flurry of merger rumors surrounding the stock and the takeover talk has pretty much died down.
So until Sun's fundamentals show some real signs of improvement, it's going to be tough for the stock price to head materially higher.
"Sun is still a show-me stock," Wong said. "To use a baseball analogy, they just got a base hit in the top of the first inning. It's too early to say Sun is recovering."
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