Can Sun Find Shelter from the Dot-Com Storm?
From Business Week
The Web-server heavyweight's perceived reliance on Internet companies has crushed its stock. Now it's trying to shift its focus
It built its image as the company that puts the "dot in dot-com." And over the past two years, Sun Microsystems (SUNW ) has watched its stock soar with the Internet. Last September, the server, storage, and software maker's stock peaked at an all-time high of $64.66 per share -- a two-year rise of more than 600%. Salomon Smith Barney hailed the world's leader in UNIX servers as "simply brilliant."
In hindsight, that glowing praise now looks like a classic cue to sell the stock. A technology slowdown, led by the fall dot-com disaster, has sent virtually every silicon Icarus into a screaming nosedive, including Sun. On Dec. 20, the Palo Alto (Calif.) giant closed at $27.50, capping a month in which the company lost nearly half of its market value. That's right -- in one month. Sun has perked up a tad since then and as of Dec. 27's close sits at $30.37.
Leading the retreat were the very analysts who so recently were singing Sun's praises. Only four weeks ago, Sun got a strong buy rating from 14 analysts. Today, only seven hold that view.
"HIT PRETTY HARD." What happened? The softening market for the servers that run Web sites and Internet infrastructure will slow the sales of Sun's marquee products in the coming year. Equally distressing are manufacturing difficulties that could keep Sun's next generation of products off the market for an extra month.
That might be an opening for competitors to grab market share in 2001's first quarter, if they can get their act together. The stock prices of Sun's closest competitors in the server market -- IBM , HP (HWP ), Dell (DELL ), and Compaq (CPQ ) -- have all dived as well in recent months. HP has dropped from a high of $78 in April to $32.44 on Dec. 27. "If you look at all the highfliers, they've all been hit pretty hard," Merrill Lynch analyst Tom Kraemer says.
For its part, Sun says these concerns are largely unfounded. Executive Vice-President for Systems Products John Shoemaker claims the company's orders and expectations have not changed since its triumphal stock performance in September. And he asserts that Sun is in better shape than other companies in his sector to maintain momentum in a slower economy. Analysts certainly agree with Shoemaker that Sun's current product line is top-notch. And they expect the company's fortune to improve sometime in 2001. But the next quarter could seem like an eternity for Sun, says Kraemer.
CONSERVATIVE SPENDERS. Long the big fish in the server market, Sun's perceived reliance on dot-com companies seems to have affected the market's perception of it. As Shoemaker admits, Sun "established such a strong brand image as the dot in the dot.com." The company has reduced its reliance on dot-com dollars over the past year and shifted more weight to traditional technology businesses that have always been its primary customers. But that substitution leaves Sun concentrating on customers that tend to spend more conservatively than dot-coms strewing dollars left and right. Translation? Slower growth.
According to Kraemer, Sun is having trouble meeting demand for its latest line of UltraSPARC low-end workstations. Furthermore, A.G. Edwards analyst Shelby Seyrafi says a manufacturing glitch at plants of partner Texas Instruments has delayed the release of the Sun's new Sun Blade workstation and Sun Fire server. Both products were previously slated for release before the end of 2000 but are now due to come out in late January or early February, Seyrafi says.
Meanwhile, other supply problems -- such as shortages of memory -- are likely to delay the release of the company's Legacy workstation. Unforeseen just three weeks ago, according to Seyrafi these shortfalls "butchered" Sun's switchover to its newest family of microprocessors in the low-end workstations. That, he ventures, could make the company especially vulnerable this quarter and could put as much as 12% of the company's revenues at risk.
ON TRACK? IBM and HP are trying to take advantage of this temporary weakness and gain market share next quarter. Big Blue has introduced a new mainframe that could invade Sun's turf by taking the place of clusters of servers. And HP recently released two new servers that analysts say will compete for a shrinking pool of hardware dollars. Still, Sun expects to hit on all cylinders with its UltraSPARC production within three months, says Shoemaker. In fact, he says the company is on track and is already shipping some of the products out.
Hitting shipment dates, however, may not be enough for Sun or any of its rivals. According to a recent Computer Economics (CE) survey, U.S. hardware spending will increase to $182 billion in 2001, up from $170 billion this year. But because of a spending reshuffle, a chunk of that money will go to the wireless sector, while spending on servers will decline next year compared to 2000, says Michael Erbschloe, CE's research vice-president.
That means Sun and the rest of the server crowd should expect fewer orders. "They're in for some hard times again," Erbschloe says. He notes that companies generally replace servers every three years and that the server market should pick up again in six months to a year, as companies get rid of their aging machines.
Such negative pronouncements don't phase Shoemaker. "We believe we are better positioned in case of such downturn than our competitors," he says. A.G. Edward's Seyrafi still calls Sun an "outstanding" company and a "category killer." However, that didn't stop him from downgrading the stock on Dec. 20 from buy to accumulate. While Sun still rules the server roost, it'll have to regroup before it can resume its ascent to the heavens. |
