I'm already tired of articles comparing SUNW and DELL. From tomorrow's _The Red Herring_:
"Don't let the Sun go down on me"
By Dan Briody
Redherring.com, January 22, 2001
In today's world of pre-announcements,
earnings shortfalls, and "challenging"
economic climates, you would think
investors would be thrilled that Sun
Microsystems (Nasdaq: SUNW) met its
fiscal second-quarter earnings estimates
of 16 cents a share and that revenue
increased by 44 percent over the same
period last year. But you would be
wrong.
Instead, Wall Street punished Sun's stock, knocking nearly 11.5
percent off the company's market value, with shares closing on Friday
at $30.88. (Sun reported its earnings after the closing bell on
Thursday.) Given that Sun's major competitors have all either
pre-announced weak numbers or reported sluggish revenue growth
this quarter, it makes one wonder what investors were expecting. At
first glance, the sell-off hardly seems warranted, considering how
difficult a quarter this has been for other hardware manufacturers.
But Sun is just now starting to become burdened by its previous
successes, and it is beginning to look like it might be the Dell
(Nasdaq: DELL) of 2001 -- that is, a victim of tougher year-over-year
comparisons as growth inevitably slows. And Sun indicated in its
conference call to analysts on Thursday that revenue growth will be
lower in 2001 than it had previously forecast.
Over the next few quarters, Sun will have a lot to live up to. In its
fiscal third quarter of 2000, the company's revenue increased 36.4
percent on a year-over-year basis. And in the fiscal fourth quarter of
2000 and first quarter of 2001, year-over-year revenue increased by
42.7 percent and 61.6 percent, respectively. So it's safe to say that
Sun will face some pretty tough comparisons for the rest of this year
-- and this is the first time in a long time investors might have to settle
for less than they expected.
So although investors may have overlooked just how impressive the
most recent quarter was for Sun, especially in light of how
devastating it was for most of its competitors, that's only because they
have seen this happen before to companies like Dell.
PREËMPTIVE STRIKE
Sun revised its revenue forecast for fiscal year 2001 to between 30
and 35 percent, down from the "mid-30s" guidance given last quarter.
In 2000, Dell began the year predicting 40 percent revenue growth,
and revised the number downwards three times before finally settling
on 27 percent. Apparently, investors saw the parallels.
So when Sun chief financial officer Mike Lehman opened up the
earnings conference call Thursday evening, it wasn't surprising that he
was very eager to put his spin on the results before dissecting the
numbers. "I must tell you up front that this was quite a challenging
quarter, but we are among the very few major companies that did not
disappoint you with a pre-announcement," he said. "The market is a
strange thing. Companies pre-announce, set lower expectations,
sometimes beat the lower expectations, and get rewarded."
Mr. Lehman does have a point. A day before Sun reported its
earnings, IBM (NYSE: IBM) announced that it had achieved 6
percent revenue growth, and was projecting just "high single-digit"
growth going forward. Yet its stock jumped 15 percent on the news.
And when Microsoft (Nasdaq: MSFT), after guiding estimates
downwards for the first time in ten years last month, met its revised
numbers, its stock increased nearly 8 percent. But the problem for Sun
isn't that its outlook is worse than IBM's or Microsoft's. Simply put,
the stock was sold off so sharply because it is still pretty expensive
when compared to its peers.
STILL AIN'T CHEAP
Sun is currently trading at a multiple of 43 times its 2001 earnings,
and that's after Friday's 11.5 percent haircut. That's more than twice
the price-to-earnings ratio of other hardware makers in its peer group,
like IBM, Hewlett-Packard (NYSE: HWP), and Compaq Computer
(NYSE: CPQ).
CEO Scott McNealy says the company will achieve its 30 to 35
percent growth, despite an obvious slowdown in IT spending, by
continuing to take market share from its competitors. Mr. McNealy
claims that Sun is gaining share in every geography where they do
business, and sees the gains as the ultimate panacea for a slowing
economy.
"The Internet is still wildly under-hyped, underutilized, and
under-implemented around the world," says Mr. McNealy. "We're
going to continue to gain big-time share, I don't care what is
happening macroeconomically."
According to data from International Data Corporation (IDC), Sun,
which already is the Unix market share leader, gained even more
market share during the 12 months ended September 2000. But
according to Mark Specker, an analyst at Wit Soundview, the
low-hanging fruit has already been picked off the tree. "The easy
share points have already been won, and once you've got them, the
only thing you can do is lose them," says Mr. Specker. IBM and HP
have both gotten more serious about the Unix market in the past year,
and that won't make gaining share any easier for Sun.
The fact that Sun had a stellar 2000, and a very strong start to 2001, is
undeniable. But remember that at the beginning of last year, investors
desperately wanted to believe that Dell could sustain its growth,
despite all evidence to the contrary. The warning signs were there,
but investors were living in denial. This year, it looks like they've
wised up.
redherring.com
Lynn |
