Sun Is Overdone

When it rains, it pours. And when the sun shines, you'd better wear sunscreen. You want a tan, not third-degree burns.

Mr. Market is certainly pouring sunshine on Sun Microsystems (Nasdaq: JAVA  ) today. The stock price has ballooned by more than 20% since Sun reported $3.2 billion of second-quarter sales and a GAAP net loss of $0.28 per share. For those keeping score at home, that's down from $3.6 billion in sales and a profit of $0.31 per share a year ago. And while the overnight pop should be welcome for current investors, let me remind you that Sun was trading higher than this sub-$5 level less than a month ago; it's lost 70% of its value over the past year.

In other words, put the champagne back on ice. This is not the magical turnaround you have been hoping for.

Me, I wanted to see some fresh thinking out of Sun's management. Instead, I only got the usual potpourri of "Wow, we can do benchmarks!" and "We're still releasing new products!" For example, you might think that Sun could make a move in the red-hot virtual server sector, based on its xVM virtualization platform. But the virtualization and software management division saw a 29% yearly slide in sales, while rival VMware (NYSE: VMW  ) reported a 25% year-over-year sales increase. That's one opportunity lost, or at least rapidly slipping through Sun's hot little hands.

The company keeps plugging on both the hardware and software sides of the house, as if Sun were a miniature IBM (NYSE: IBM  ) or Hewlett-Packard (NYSE: HPQ  ) . That may have been true 10 years ago, when Solaris servers and Sparc chips were the envy of Silicon Valley, playing vital parts in the early years of the Internet.

But Sun lost a step somewhere. It became an also-ran, with flagging sales and a multiyear stock slide. Now, even little Linux veteran Red Hat (NYSE: RHT  ) can rival Sun's market cap, while HP, Dell (Nasdaq: DELL  ) , and IBM are making mincemeat out of Sun's server share. Even Cisco (Nasdaq: CSCO  ) now wants a slice of that hardware pie. Get out while the getting's still decent, Sun.

My suggestion is simple: Split the old Sun into two businesses. Let one company figure out how to sell chips and servers, while the other gets a handle on turning a profit from open-source software. Hey, I've seen more radical splits than that lately. At least this one would actually make sense.

Further Foolishness:

Dell is a Motley Fool Inside Value recommendation, while VMware is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund owns shares in ... well, none of the companies discussed here. You can check out Anders' holdings or a concise bio if you like. The Motley Fool is investors writing for investors.


Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2009, at 7:17 PM, LadislavDobias wrote:

    Splitting is maybe not a bad idea.

    But then, I think, the products like new Sun Storage 7000 - a disk array, with Flash memory as a cache, and driven by opensource OpenSolaris with ZFS, would not be easy to do... What do you think?

    You can read more about it in blog: http://blogs.sun.com/jonathan/entry/managing_a_bestseller

  • Report this Comment On January 28, 2009, at 9:09 PM, DivisionBelle wrote:

    The "Fat Old Sun" has gone to "The Great Gig in the Sky".

    Much as I've been entirely unimpressed with Dr. Ponytail's inability to communicate his strategy for Sun until yesterday's earnings call what he is doing actually makes sense, seems to be working, and keeping the company whole to manage the transition makes even more sense.

    There is a major transition occurring in the tech industry, and "economic cycles help" to quote Sam Palmisano. Whether Sun can retain enough momentum and credibility to weather the storm is another question.

    Jonathan is turning the company into a very different kind of animal focused on becoming "The Dot in Web 2.0" and attempting to position Sun to earn a silver lining from "The Cloud". If he makes it, Sun will be a very different company, but very possibly viable in an entirely new guise.

    In the meantime, I'd back HP, IBM and Cisco to be the leading and profitable IT infrastructure companies going forwards.

    For the record I'm an ex Sun employee, an IT consultant with 25 years in the business, and I'm glad I dumped all my Sun stock several years ago.

  • Report this Comment On February 10, 2009, at 8:53 PM, gweech wrote:

    For the record, I am also a ex-Sun employee who sold my stock. The bottom line is that Sun needs a net new technology that blows all other technology away. Everything else in their portfolio is "me too" or at least that is how it is perceived. What is interesting is that Sun brought 64 bit processors to the market 15+ years ago AND tried to pitch cloud computing almost 10 years ago. They are always the first to innovate, but fail miserably at execution. Cool Threads is killer technology, but nobody knows why they should buy such "cool" technology. Sun is definitely not dead, but their current '2.0" play really needs some innovation that disrupts the current IT status quo and then they need to drive the market.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 819350, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:17:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement