Sun stock bursts into breakout
mercurycenter.com
January 5, 1999
BY ADAM LASHINSKY
Mercury News Staff Writer
In the last few days, Sun Microsystems Inc. (Nasdaq, SUNW) CEO Scott G. McNealy has been interviewed in a bullish segment on the ''60 Minutes'' television news magazine, profiled as one of the ''top 25 executives of the year'' in BusinessWeek and treated to Merrill Lynch & Co. raising its price objective on Sun's already high-flying stock.
The result of this publicity and three months of Wall Street rediscovering Sun has been the first ''breakout'' in its stock since the middle of 1997. After trading between $40 and $50 essentially for all of 1998, Sun's stock began racing from $40 in early October to Tuesday's close of $92.56.
Why the Sunburst?
''Like Cisco, Sun has now become recognized as a core Internet infrastructure stock, and that puts it on a whole different valuation curve,'' crows a venture capitalist, a Sun worshiper who didn't have to remind his listener that he emphatically believed on Oct. 1 that Sun's stock was ready for takeoff. But can it grow from its current valuation, essentially 33 times Wall Street's earnings estimates of $2.77 per share for the year ending in June? ''I'm still bullish,'' says the Sun lover, who also is a shareholder.
The excitement over Sun -- and the reason for the comparison to Cisco Systems Inc. (Nasdaq, CSCO) -- is that its primary business is making powerful computers known as servers that handle Internet traffic, among other tasks. It's a perfect example of the ''other'' kind of Internet company, the type that actually earns profits from the explosion of Internet usage.
In other words, Net users may log on to visit unprofitable sites like TheGlobe.com Inc. (Nasdaq, TGLO) or Excite Inc. (Nasdaq, XCIT), but their service providers and the Web sites themselves need equipment made by the likes of Sun and Cisco to make the connections happen.
Sun even is adding advertising of its own to its ample free publicity to hammer home the message that it legitimately can call itself a ''dot.com'' company.
''Normally, we'd be looking to downgrade stocks after a big run,'' writes Steven M. Milunovich, hardware analyst with Merrill Lynch in New York, who advised clients Monday morning to keep buying Sun's stock until it hits $103. ''Electronic commerce and the coming world of information appliances require a sophisticated computing infrastructure. With the emphasis shifting from computing to communicating, investor attention has been on putting in the communications infrastructure, with Cisco as the best play. Once the data arrives it has to go somewhere, however, which is where servers and storage come in.''
Milunovich calls Sun, along with International Business Machines Corp. (NYSE, IBM), ''the best Internet computing stories,'' adding, ''we love the .com ads because they're linked to the strategy.''
PEOPLESOFT CFO'S QUIET EXIT: Ronald E.F. Codd has left quietly as chief financial officer of PeopleSoft Inc. (Nasdaq, PSFT), but his departure is likely to result in more noise at the Pleasanton-based software maker.
Alfred J. Castino, 46, Codd's replacement as CFO, says he'll consider ending the company's hard-and-fast rule against holding quarterly conference calls. As PeopleSoft's CFO since 1991, Codd took the highly unusual -- and highly principled -- step of not holding teleconferences with institutional investors that often turn into wink-wink-nudge-nudge sessions for elite stockholders.
Codd relented last year and held a special call to reassure investors as PeopleSoft's stock was falling. Perhaps he shouldn't have: The stock dropped further. Now Castino appears likely to fall into line with the rest of corporate America.
''I'm open to the idea (of holding calls),'' says Castino, who's logged time at Sun, Chiron Corp. (Nasdaq, CHIR) and Hewlett-Packard Co. (NYSE, HWP). ''I need to understand the context and entire history of why we don't do that at PeopleSoft.''
He adds that he definitely will not hold a call for the release of PeopleSoft's fourth-quarter earnings -- scheduled for Jan. 28 -- and that any future calls will exclude the type of hand-holding guidance that critics feel borders on selective disclosure.
Incidentally, there's less than meets the eye with Codd's exit. PeopleSoft announced Dec. 30 that Codd will become CEO of Momentum Business Applications Inc., the shell company being spun off to PeopleSoft shareholders that will ''own'' some of PeopleSoft's riskier R&D projects.
Unstated is that Codd's move is more of a resignation than a job change. Codd, 43, says he'll probably remain Momentum's only employee and that the job will occupy ''one to two days a week at most'' of his time. The ex-CFO, who led PeopleSoft's finance operations from revenues of $17 million in 1991 to about $1.3 billion last year, says he'll spend more time with his family, teach and reconsider his life's goals.
ALL IN GOOD CHEER: Persistent question from Monday's crystal-ball exercise in this space regarded whether I have any inside information on why Ray Lane will succeed Larry Ellison in 1999 as CEO of Oracle Corp. (Nasdaq, ORCL) and if I really think the Y2K issue is all hot air. While I neither admit nor deny anything, please remember one thing: Journalists do zany things like write multiple-choice prediction columns at the end of the year because there's nothing else going on. It's supposed to be fun and light-hearted -- in keeping with the spirit of the season. And besides, nobody remembers the safe guesses, just the gutsy ones.
Contact Adam Lashinsky at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190, or siliconstreet@sjmercury.com or (408) 271-3782.
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