Is Buying Sun a Bright Idea?

What's Sun Microsystems (Nasdaq: SUNW  ) really worth? After news of disappointing second-quarter results sent its shares down 7% today, investors are struggling to figure out whether Sun is a profitable play or a stock to avoid.

Quarter after quarter, the stock still manages to confound. Yahoo! Finance shows that four Wall Street analysts rate the stock as a buy, seven give it a sell, and 13 call it a hold. What to make of that? The analysts will give you just about any number you want on Sun's value -- and that, of course, is no help.

Deciding whether to buy hinges on expectations. In Sun's case, it depends largely on whether you're looking for growth or for value.

For the growth crowd, Sun just doesn't stack up. Sun's top line dropped in the second quarter and will have a tough time making amends for it anytime soon. The company's x86 hardware sales represent just 1% of its total revenue, so even explosive growth there won't have much impact on growth. Let's say Sun's Linux-friendly Solaris 10 system can grab 50% of the market controlled by Red Hat, the leading U.S. provider of Linux's operating system. At best, that would add only another 1%-2% to earnings.

Even so, the stock might have some shine for value investors. Sun's Q2 numbers show that draconian cost-cutting is paying off -- its bottom line is now out of the red. If Sun can manage to stabilize sales, the stock sells near a price-to-sales multiple of just over one. Then there's the $7.4 billion cash mountain that Sun sits atop. That alone is worth about $2.20 per share, or more than half of the company's total capitalization.

Owning Sun as a growth stock doesn't make much sense when there are so many other technology companies with better growth prospects. But the latest share-price retreat may make some investors find a different reason to like the shares.

Here's the twist: Value investors, who are normally in for the long haul, may soon find some merit in Sun as a short-term play. Growth investors, who typically have shorter investment horizons, shouldn't expect that time will give them what they want from Sun.

Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.


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