Sun Shines Light on Recovery Path
By Chris Kraeuter
TheStreet.com Staff Reporter
3/28/2005 9:52 AM EST
URL: thestreet.com
Sun Microsystems (SUNW:Nasdaq) is still traveling a tough road -- its stock hit a five-month low last week -- but the company has made several long-term strategic bets in past months that Sun says will transform its shares and the entire technology industry.
Obviously, investors haven't yet bought into Sun's vision; shares are down 25% since the beginning of the year to their current level of $4.03. Still, the company is pushing ahead, saying that it is making steady progress with its resurrection and that the new path represents a real breakthrough in computing.
The company envisions a world in which computing power is treated as a commodity, like electricity, with centralized, remote management and storage of applications and information. Other major information technology vendors, such as IBM (IBM:NYSE) , Hewlett-Packard (HPQ:NYSE) and Microsoft (MSFT:Nasdaq) , have also placed bets on this type of computing, which is known by a host of different terms, such as on-demand computing, virtualization and agility computing.
But Sun's standing in the technology universe is so eroded that the company has been forced to wager its future on making this transition happen in a more significant way than its competitors do. And this is why Sun might finally have placed itself in a position to regain much of what it lost since the dot-com bubble.
"This is Sun's first offensive strategic maneuver in years, and I see it as very interesting," says Michael Cohen, director of research for Pacific American Securities and an owner of Sun stock. "Where the future goes is always where the economies of scale lie, so what Sun has done is very strategically intriguing."
Sun is banking on being able to build server and data farms around the world to take on all computing requirements for its customers, and its ability to do it at a lower cost than customers can for themselves.
The current plan has Sun constructing five of these computing complexes, primarily at the world's financial hubs, and it has yielded a partnership with electronic communications network Archipelago to create a market for trading computing power.
"The focus for the last couple of years has been on putting away viability concerns," says Larry Singer, vice president of Sun's global information systems strategy office, adding that the company has shifted away from making sure customers understood that Sun wasn't going out of business to getting the word out about its products and initiatives. "We're very happy with how that is going, and the next thing is turning that into revenue growth," he says.
Although Sun's income statement may be battered, its bank account remains flush and its product line is robust. Joe Clabby, vice president with research firm Summit Strategies, says this latest plan is logical, considering the makeup of its businesses. "A pessimist can look at Sun and say a lot is hurting there, but an optimist can say this makes a heck of a lot of sense, given the assets they have."
Clabby says the key is for Sun to rejuvenate its sales force and get its professional services unit to support Sun's new product ideas. He'll be looking for announcements of sizable deals as indicators of whether Sun is succeeding with its latest reincarnation.
A lack of sales growth is most likely the biggest reason why Sun shares are where they currently sit. Sales have dropped every year since 2001, while cumulative losses in the past three years have tallied $4.4 billion.
Its woes have been compounded by a resurgent IBM, which grabbed the top spot in Unix server sales in 2004, a key market for Sun and the first time in 15 years that Sun or H-P hasn't held the Unix title. Sun seems content to sow discord at H-P, which is operating without a chief executive, but IBM's momentum can't be ignored.
Sun's Singer says that IBM is focused on short-term wins and that Sun has the upper hand in terms of its product route. He cited developer interest in the now open-source Solaris 10, the latest version of Sun's operating system that was launched in November. Singer says that more than 600,000 downloads of Solaris 10 is a "very significant indicator of architecture and design win activity."
IBM, however, isn't having it and doesn't plan on giving back any of the ground it's worked hard to gain. "They [Sun] keep changing direction," says Jeff Benck, vice president of IBM's blade operations. "They are searching for a home."
Indeed, investors are quick to see the arguments against Sun and are hard-pressed to ignore the recent tough times. "I have no current inclination to buy it," says Michael Holland, principal of the Holland Balanced Fund. He sold the stock because "they seemed to be spending too much time in the legal business as opposed to the technology business. It seemed to be having a detrimental impact on their business strategies."
Holland says any reason for owning the stock now would come from a favorable view of the technology cycle, which should lift all low-priced stocks going forward. But for Holland to become an owner again, he'd need to see that Sun returned to its "cutting edge" roots of years gone by. "I would need to see some really knock-out product introductions and real innovations."
According to Sun, it's already delivering. The company has partnered with Advanced Micro Devices (AMD:NYSE) to use its Opteron processors in a server-development project known as Galaxy, which is being led by Sun co-founder Andy Bechtolsheim; the latest version of Solaris is now in the development community; it's launching its dual-core UltraSparc IV+ chip later this year; and products from its partnership with Fujitsu should be out in 2006.
Still, the jury remains out on Sun and its strategy of remote data management.
"Customers are not at the point where they are going to trust vital workloads to third parties," says Dan Olds, principal of Gabriel Consulting Group. "If I lose my electricity, when it comes back on I've only lost some time. But if I lose my data, or if it finds its way into the wrong hands, then I'm in big trouble."
That's the bias Sun is going to have to overcome as it labors along the road to recovery from the implosion of the Internet bubble in early 2000. The question is whether it's heading in the right direction. |
