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Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: Sonki who wrote (12074)	11/26/1998 12:09:00 PM
From: E_K_S	Respond to of 64865

Hi Sonki - It appears that the market has begun to price SUNW shares to reflect a slightly larger growth rate (from 23% to 25%) looking forward. My earnings estimate for DEC 1999 was $2.89. My price target for DEC 1999 of $80.00 was calculated based on a 23% growth rate for next years earnings (ie FY 2000). I estimate that the AOL deal will contribute between $0.45-$0.55 per share over the next three years. This is made up of both new hardware and new service revenues. New software royalty revenue from JAVA licenses and per unit JINI royalties, probably will not contribute to earnings until FY 2000. Jini software revenue from the AOL deal would only contribute at most $0.01 per share for FY 1999 and would be based on a per unit royalty for each JINI enabled devise sold. Therefore, IMO the new software revenue stream will not impact earnings in any significant way until FY 2000 and forward. The main benefit and change for SUNW w/ the AOL deal is the increase potential to their growth rate. Assume that SUNW's overall growth rate is increased from 23% to 25%, my DEC 1999 target price and earnings estimate are adjusted as follows. ESTIMATES: FY 1999 from $2.89 to $ 3.06 an increase of $ 0.17/share. Price estimate based on 1 year forward earnings using a growth rate of 23% (ie 3.06 x 1.23) and PE of 23 would yield a price target for DEC 1999 of $86.57. Using the same estimate based on a PE of 25 and growth rate of 25. (3.06 x 1.25) and PE of 25 would yield a price target for DEC 1999 of $95.63. ===================================== Using these new estimates I believe one could justify a DEC 1999 price target of between $86.00-$96.00. More importantly is that SUNW's long term horizon is becoming more clear. As their new software revenues begin to kick in for FY2000 and forward, the market will begin to add a premium to the overall company PE, perhaps as high as 30x. Summary: =========== Since I am a long term investor, the fundamentals continue to look strong and are even getting better looking three to five years out. The growth rate should increase over this period and may be as high as 25%. Revenue growth will come from (1) increased server and hardware sales, (2) a growing storage business (both hardware and software, (3) annual service and maintenance contract revenue,(4) software sales (ie SOLARIS 7.0 OS) and (5) JINI enabled devises (ie set-top boxes). New software revenue streams should begin to kick in by FY2000, specifically JINI royalties and JAVA license fees. SUNW also has an opportunity to expand their service sales as new end-users will require set-up and annual support. These new revenue streams are also high margin items and as a result will contribute to earnings more. This will allow the market to eventually assign a higher overall company PE, perhaps as high as 30x. EKS