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The Real Story: Blister in the Sun Microsystems

Here comes the sun, here comes the sun, and I say it's all right.
-- The Beatles

It's tough to find a more hated stock on Wall Street than Sun Microsystems (SUNW - Get Report). It's not hard to imagine why. A lot of people lost some serious scratch on Sun. The stock traded as high as $64.65 in September 2000, only to lose 96% of its value before bottoming out at $2.34 in October 2002. The stock has nearly doubled since then, but is still off a heart-stopping 93% from those lofty levels of 2000.

Furthermore, Sun has been profitable in just five of the past 20 quarters and cash flow positive in just four of the past 20 (in fairness, cash flow from operating activities has been positive for eight consecutive quarters). The company's cost structure is too high and it is giving away its software. Not exactly the stuff upgrades are made of.

In fact, only three sell-side analysts rate the stock buy, compared with 13 holds and seven sells.

The Consensus Story: The Street is concerned about margins -- especially considering that Sun's software is now free to download. Sun's software strategy is a move to support open source, reflected in the company's announcement it will provide technical support to help programmers adapt Linux or other open source software systems for new servers that use Sun's Sparc chips.

Management hopes that by offering its software for free, it will attract more customers who will sign up for service contracts. Organic revenue is declining as is Sun's core server business. Analysts are taking a wait-and-see attitude before supporting the stock.

The Real Story: Value investors have been quietly amassing shares of Sun. The company is in the midst of an overhaul of its business. The recently acquired StorageTek should boost margins and fit in well with Sun's product portfolio. The company is beginning to see some traction in its core business.
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