Sun Microsystems, Inc.
In Reply To:
Being Optimistic Doesn't Mean Being Correct

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By NorthCarolinaKen
October 7, 2003

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Thanks for the post, and I agree that the stock is risky. The question is whether or not customers will do large projects again. If not, your Lucent example is a good one. I think they will, however. I don't think they can avoid it. I don't know when, though. This could go on for a couple of more years but there are recent promising signs that things are turning.

The institutions will buy into the stock when everything is moving and they will pay much more for it. One of my brokers has Genentech a #1 buy at $80 but avoid when it was $29. Cisco is now a "buy" at $20 but a "hold" when it was at $11. What was different between those calls? One is that people didn't pile into the stock at $11 but they do at $20 when the short-term business outlook is clearer. The professionals get graded on how they do quarter to quarter which is why Merrill wants Sun to layoff 6,000 employees to show an immediate profit regardless of what it does to the company strategically. Wall Street has a very short-term view and most institutions are momentum investors because of it.

Sun is one of the great, blue chip tech stocks. It could end up as another Silicon Graphics, Data General or DEC but I doubt that. They also have a good balance sheet given the environment and a huge cash position. If you think like I do that the IT investments must return and that the demand for big servers will return with it, then Sun is a good long term buy. Because I don't care what the stock does in the next quarter, half, year... I have an advantage over the professional. They CAN'T buy the stock in here.

Sun is sloppy with their investments at the low end. One has to think that part of the Mad Hatter investment is simply "Great White Whale Complex," go after Microsoft for example. OK when things are fat but one wants to see a better relationship of investment to return in this environment. Also, they are getting some heat from IBM in head to head competition at the high end. That is another exposure but so far, Sun and IBM (and at one time HP) duked it out generation after generation with each company gaining a temporary jump. It could be different this time but that is not the long bet.

If you are looking for bargains, most of the situations you find are not very pretty and this is certainly in that class. I do think that with the market stabilizing, the Sun cash position and the stock price where it is that there isn't much risk on the downside. With all the histrionics last week, the stock didn't move much. The upside, however, looks real good to me. EMC has had a similar trajectory and took the same kind of revenue hit going into the recession. Storage is moving earlier than big servers and EMC is coming out rather well. My EMC position has about a $2.50 basis and the stock is trading near $14 today. My view at the time was that companies couldn't survive without growing storage so it was a bargain. When was very unclear.

Thanks again for the post. I could be wrong and I am not a wild-eyed optimist on the stock. I do expect that a recovery like EMC's is the most likely scenario. If the situation deteriorates from here, I have no difficulty getting out of the stock either.


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