Sun's Eclipse Can't Last Forever

By Gene G. Marcial

Looking for the Light
Sun Microsystems (SUNW ) has been an investment disaster for five years, with the stock way down from 64 in 2000 to 3.85 now. "And most analysts are still quite negative on it," says Ken Perkins of Thomson First Call (TOC ). Consensus forecasts, he notes, call for a loss of 22 cents a share in fiscal 2004 ending June 30 and 2 cents in fiscal 2005. Sun was also in the red in 2002 and 2003. But Charles Lemonides of investment firm ValueWorks, who has been buying shares, says the Street's bearishness is already in the stock. He believes Sun is headed higher -- to 10 in a year -- if it succeeds in shifting focus from selling hardware and software to servicing and licensing that generate recurring revenues. Lemonides says Sun is discounting the price of its hardware to users who sign up for services and also offers free hardware to developers who license its software. Analysts are paying scant attention to this recurring-revenue business model. George Elling of Deutsche Bank (DB ), which has done banking for Sun, is also bullish. He says Sun holds a "significant balance of cash and investments ($1.67 a share), and its operating cash flow is now positive."

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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