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Analyst warnings prompt Sun decline

Shares of Sun Microsystems hit a new 52-week low after two prominent investment banks downgrade their ratings on the technology bellwether.

4 min read
Shares of Sun Microsystems hit a new 52-week low Monday, after two prominent investment banks downgraded their ratings on the technology bellwether.

Sun stock closed regular trading down $1.88, or 6.2 percent, to $28.56, after hitting as low as $27.81 during the day. The stock, which has traded as high as $64.65 in the past year, is down 25.7 percent since the beginning of December and 27 percent since the beginning of the year.

The slump was prompted by new reports from prominent Wall Street analysts predicting that the company will struggle for the next two quarters. In morning research notes issued Monday, Merrill Lynch and Prudential Securities experts downgraded Sun to "accumulate."

Palo Alto, Calif.-based Sun is the top seller of Unix servers, high-powered machines that run corporate networks and online services. The company's success has attracted increased competition from IBM and Hewlett-Packard.

Since the late 1990s, Sun has been extending its dominance into low-end and workgroup servers, low-end workstations, and storage. Partners and customers include Nokia, Motorola, Sony and Enron. Its technology has become the standard for Internet companies, and this year, executives proudly chanted the company's slogan, "We're the dot in dot-com."

But the company's position as dot-com standard bearer may be its undoing, one analyst said. As e-commerce companies struggle to survive a Darwinian shakeout on Wall Street, many are slashing expenditures and bailing out of deals inked with larger technology providers such as Sun.

"Sun is being impacted by the 'dot-com' effect, and we believe there are yield issues regarding the UltraSparc III, which could mean we are not going to get a new mid-range product from Sun in early summer, which we had thought," wrote Merrill Lynch analyst Tom Kraemer. "In addition, the high-end products may not be available until this time next year. We think this is important, as Sun's ability to compete in the enterprise market depends on its ability to get product out in a timely fashion."

The analyst predicted that Sun's current woes will last for about two quarters, noting that Sun remains "well-positioned" in the very long term.

Sun spokeswoman Kasey Holman denied any delays of upcoming products. "We're still on course," she said. The company will introduce all its new UltraSparc III-based servers within the next six months, she said.

Upcoming systems are lower-end "Daktari" systems, midrange "Serengeti" systems and high-end "StarCat" systems.

Since the stock market crash that hobbled many e-commerce companies in April, Sun has vociferously disagreed with critics who say it relies on dot-coms and other relatively small technology companies.

At a technology investment conference in May, Sun chief financial officer Michael Lehman took pains to emphasize that about 90 percent of the company's revenue comes from Fortune 1,000 companies eager to build their e-commerce divisions and bolster their Internet infrastructure. Only about 10 percent of revenue comes from Internet start-ups and Silicon Valley dot-coms, he said.

In an interview with CNET News.com about three weeks ago, Sun Microsystems chief operating officer Ed Zander emphasized that the company can easily pay its bills through revenue from established, financially sound customers.

"I never thought Toothpaste.com was going to make Sun," Zander said. "We did know that working with the optical companies and the Internet infrastructure companies and the Inktomis and the portals was going to drive a lot of this. Plus we also knew when we talked to a GM and a GE and a Citibank and a Gap and a Wal-Mart that they were going to re-architect their supply chains and business processes and customer service stuff. That's where the money was going to be made in this whole dot-com area--that they were going to dot-com themselves like Sun was."

Zander also said that he and other Sun executives had been bracing for a dot-com fallout for some time.

"I figured there might have been a shakeout at some time, but we had a very small part of our business in that anyway," Zander said. "Don't confuse AOL with a new dot-com company. I look at AOL and eBay; I look at Exodus; I look at Digix--these guys are going to be players for a while."

To be sure, a lot of Wall Street analysts agree with Zander. In an overwhelmingly bullish research note issued Sunday, Goldman Sachs analyst Laura Conigliaro said Sun is emerging as the de facto industry leader and standard bearer for servers.

"Sun frequently comes up on other computer makers' radar screens as the competitor to beat," Conigliaro wrote. "Its technology efforts and strategic direction are based on the explosion in the number and range of devices that will be part of a network that will demand networked services in the future. With bandwidth performance growing faster than processor performance, there will be a greater need for larger servers, and with this in mind, Sun is focusing on scaling its systems well beyond its current capabilities."

News.com's Stephen Shankland contributed to this report.