Sun feels pressure in NCs and Java

Sun Microsystems is taking heat on many fronts, and its stock is starting to sweat.

3 min read
Sun Microsystems (SUNW) is taking heat on many fronts, and its stock is starting to sweat.

Sun's shares hit 50 in early February Sun stock chart but have since retreated into the 30s. Today the stock dropped to 38-3/8, down 2 points from yesterday's close of 40-3/8. Despite the slide, the shares are trading well above the 52-week low of 25-7/8 set in April 1997, and Sun--led by outspoken chief executive Scott McNealy--remains bullish on its prospects.

The company was downgraded today by Morgan Stanley Dean Witter analyst Thomas Kraemer to "outperform" from "strong buy," based on inroads in the server business made by the competition, such as Hewlett-Packard (HWP). Sutro & Company analyst C.B. Lee also downgraded the stock yesterday, to "accumulate" from "buy."

Sun's shares have been hurt by the uncertainty surrounding the viability and profitability of network computers. The company's Java strategy also has been questioned, and competition mounts for Sun as the scalability of NT continues to improve.

Kraemer said that HP demonstrated that 10- and 12-processor Wintel servers are technically feasible, and those products are aimed at "enterprise-class," or high-end business environments--the same market that Sun targets.

As a result, HP's offering could increase the pricing pressure on the Unix low end, cutting into Sun's profit margins, Kraemer said in his research report.

"We believe that the low end of the Unix business may not be as secure as it was only three months ago," he said. "[While we believe] the immediate impact of these results on Sun to be slight, we cannot escape the conclusion that NT has achieved a new scalability high-water mark."

The scalability gains for NT raises the risk on Sun shares, but, Kraemer said, "We continue to believe that Sun holds one of the strongest positions in the hardware market and that it can drive and benefit from consolidation of the Unix server vendors." Sun also is poised to benefit from consolidation in the server market, he added.

Kraemer cut his third-quarter earnings estimate to 58 cents a share from 60 cents and lowered the fiscal 1998 estimate to $2.29 a share from $2.32 a share. He also lowered his 12-month price target to $55 a share from $57 a share.

HP is taking on Sun in another area as well: Java.

Kurt King, an analyst at NationsBanc Montgomery Securities, said in a recent report that he is unsure of the full implications of HP's decision to create its own version of Embedded Java instead of licensing from Sun. "For now," he said, "we view it as a minor negative."

King also was concerned about the third quarter being brought down by weak sales in Asia.

"While our checks in the U.S. market continue to come up positive, we are concerned that Sun's business in Asia is sufficiently weak to bring in third-quarter results below current expectations," he said, noting that about 20 percent of Sun's sales come from Asia, with Japan accounting for about half of the sales in that region.

Other issues that have deteriorated Sun's stock price include a growing concern about the commercial prospects of network computers. Sales of those computers--NCs based around the Java programming language in particular--have not met expectations. Only 144,000 NCs were sold last year, about half the number that was projected, according to a recent Dataquest report.

Uncertainty about network computers also knocked Oracle's (ORCL) stock back a notch Friday.

Oracle said today that revenue for the Sun Solaris platform grew more than 50 percent for the third quarter, as compared with a year ago, due to sales of its enterprise products, databases, and ERP solutions.

While scalable systems based on NT pose a threat to Sun, the workstation and server maker achieved a major legal win last month when a federal judge ordered Microsoft to remove the Java-compatible logo from its products pending a final outcome in the case.

The ruling requires Microsoft to remove the Java logo from its Internet Explorer browser and Software Developer Kit for Java. Microsoft has used the logo to promote both products as being Java-compatible.

The win stems from a suit Sun filed in October, in which Sun alleged that Microsoft's implementation of Java did not pass compatibility tests required of all licensees. Microsoft has denied the charges.