Friday, January 14, 2005

Sun Micro Befuddling Us All

I keep on getting asked whether or not Sun is worth buying at these levels. My answer: I don't know. I've never owned the stock, just seen its breathtaking chart action during the 90s on paper. From what I gather, this is a long term play while investors wait for the networking giant to further pare down debt and fend off the open source calvalcade--thank you Red Hat. One commentator summed up my opinion quite nicely
For the growth crowd, Sun just doesn't stack up. Sun's top line dropped in the second quarter and will have a tough time making amends for it anytime soon. The company's x86 hardware sales represent just 1% of its total revenue, so even explosive growth there won't have much impact on growth. Let's say Sun's Linux-friendly Solaris 10 system can grab 50% of the market controlled by Red Hat, the leading U.S. provider of Linux's operating system. At best, that would add only another 1%-2% to earnings.
Even so, the stock might have some shine for value investors. Sun's Q2 numbers show that draconian cost-cutting is paying off -- its bottom line is now out of the red. If Sun can manage to stabilize sales, the stock sells near a price-to-sales multiple of just over one. Then there's the $7.4 billion cash mountain that Sun sits atop. That alone is worth about $2.20 per share, or more than half of the company's total capitalization.
I don't think Sun can really fall any further. The most respected tech analysts on Wall St. picked Sun to perform in 2005 . On the other hand, yesterday's leader may simply be today's laggard. Personally, I'd hrow a small grab of money at it and start looking for tomorrows next Sun Micro--but just give me a call when you find it.

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