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Sun's stock also rises

Like a jolt of java, Sun Microsystems' recent deal with online giant America Online has helped fuel a three-fold jump in its stock price--pushing it to historic highs.

Like a jolt of java, Sun Microsystems' recent deal with online giant America Online has helped fuel a three-fold jump in its stock price--pushing it to historic highs.

Sun's stock, which has slowly climbed from the mid-20s in early 1996 to the low 40s last fall, has roared ahead in the last six months to new highs. Today it hit another new level as it reached 127 in midday trading. And at the end of the day, it closed at 125.9375, up 1.4375 points.

"Sun's stock doubled because of Sun's performance. But it tripled because of the AOL thing and its dot.com marketing," said David Wu, an analyst with ABN AMRO, in reference to Sun's share price over the past six months.

Sun's performance in the workstation market is also part of the equation. Microsoft's NT-based workstations have been a constant threat to Sun's overall markets during the past few years. NT-based workstations have grown at a fast clip in the low-end of these markets, while sales of Unix-based machines, such as those from Sun, have remained virtually flat.

But although the Unix market hasn't grown during this time, Sun has managed to post revenue and earnings growth by taking market share away from other traditional Unix vendors, such as Silicon Graphics.

Sun, in 1998, also fought back with pricing with a new series of low-cost workstations, which have sold well.

Putting the stock price into perspective, Wu said: "If you look at the price of Amazon, Sun looks anemic. But if you compare it to IBM or Hewlett-Packard, it looks great."

IBM and Hewlett-Packard have also seen their stocks rise during this six-month period, but not in the doubling and tripling range.

Sun's stock, while climbing, got a particular boost last November when America Online announced it would acquire Netscape Communications in a deal valued at $4.2 billion. As part of that announcement, AOL also formed a joint-alliance with Sun, to market business software from both the server and workstation maker, and Netscape.

Meanwhile, Sun has also embarked on a marketing campaign which says its products provide the "dot" in dot.com. Recent customer wins from this campaign include Egghead, McDonald's, and Saab.

Sun's financial performance, however, has also offered a leg up to its stock price, analysts note.

"They are a well-managed company that delivers on its [earnings estimate] numbers," said C.B. Lee, an analyst with Sutro & Co. "Last October they were hit by the economic crisis in Asia, but they have come out if it stronger than other companies. We expect their business in Japan to be up sequentially for the third quarter and that should benefit the stock."

When Sun reports its third quarter results next month, analysts expect the company to post improved earnings over a year ago. Analysts anticipate earnings of 70 cents a share, according to First Call. Last year, Sun posted earnings of 59 cents a share, excluding one-time charges and gains.

Revenues for the quarter are expected to reach around $2.9 billion, up from $2.4 billion in the year-ago period.

Thomas Kraemer, an analyst with Morgan Stanley, noted that retailers moving their operations online and the Enterprise Resource Planning (ERP) market is expected to drive demand for Sun's products in the second half of calendar 1999.

And Sun's interest in outsourcing non-strategic information technology and other functions could provide a sizable cost savings over the next two to three years, according to his report.

Currently, Kraemer has a 12-month price target of $132 a share on Sun shares. Daniel Kunstler, an analyst with JP Morgan, today raised his target price on Sun to $150 a share.

Meanwhile, Sun believes it is winning the war against its arch-rival Microsoft. In the previous quarter, Scott McNealy, Sun's chief executive, said delays in Windows 2000 and Intel's 64-bit Merced and McKinley chips had given his company lead time.

McNealy had said these events would create a delay of a couple years in getting ported, tuned applications onto Merced or McKinley chips.