Darrell -
I was lured by Jim Kelley into a fairly intensive analysis of SUNW over the last couple of days, and came to the following conclusions -
DELL was driven primarily by its rapid revenue growth and market share gains. It was to some extent "driven by fundamentals" - except that investors somehow got the impression that DELL would continue to grow at those rates. When inevitably those rates slowed, DELL got caught - it was priced for revenue growth continuing at 50%, when 40% or less now seems more likely.
SUNW is obviously not priced based on anything related to its business. As an enterprise business, it is smaller, less profitable, and has less market share than CPQ's similar enterprise group. Yet obviously, CPQ is in the tank and SUNW is soaring.
SUNW is being priced that way because they are perceived as innovators (java etc.), bastions of the true Unix faith (true BTW), and likely owners of the e-commerce architectural landscape (also some truth to that). No one knows what the business value of those characteristics are, but SUNW is to some extent an internet play with an underlying technology company (which happens to be growing well and making money).
SUNW is not particularly well managed - they are one of the technology-driven techs, they do lots of stuff "because it is a good idea" and not because it will make money, and they invest a lot in proprietary components and software - all of which leads to a much higher cost structure than any of the Wintel vendors. That made them fun to work with but up until recently, it also made them a poor investment.
Now nobody cares. If the internet stocks can soar to huge valuations with no business model and no hope of either revenue or profits, how much more is a company worth when they have many of the same attributes of "getting the internet" and also have a sound financial base?
My conclusion is that the SUNW phenomenon is relatively sustainable - and that perhaps the answer to Kemble's question (who is the next DELL) is SUNW, at least for the next few years.
I am as a result looking at making an entry in SUNW - probably via LEAPs - despite having been pretty bearish on them a few months back. I was looking at it wrong... and you are too.
DELL's problem, as I said a ways back, is that they are perceived as the "last pure PC company" and that's not a compliment any more. The ability to do rapid innovation, see the big shifts and have something ready for them, try lots of stuff, some of which, like java, may assure architectural dominance, and some of which, like the purchase of CRAY technology to create the UE10000, can catapult SUNW into an entirely new market (which they now dominate), creates the impression that SUNW will survive and thrive no matter what the future brings. DELL is increasingly looking like a company which will do a fine, well managed job of owning an increasingly uninteresting business.
I still think DELL will grow revenues by better than 30% next year, and that they will get into the mid-50's in 2000. But that's not a very interesting opportunity for many of today's investors. |
