Gloomy skies over

Sun Microsystems

(SUNW) - Get Report

got grayer Wednesday after

Merrill Lynch

analyst Tom Kraemer cut his rating on the stock to neutral from accumulate while scaling back earnings estimates.

Kraemer dropped Sun's fiscal 2001 earnings-per-share estimate to 65 cents from 68 cents and its 2002 earnings estimate to 84 cents a share from 89 cents a share. Current Wall Street consensus estimates, according to

First Call/Thomson Financial

, call for Sun to make 66 cents a share in 2001, and 84 cents a share for 2002.

Kraemer also lowered his revenue estimates on the server maker, pegging fiscal 2001 at $20.7 billion, a $200 million reduction from previous forecasts. Fiscal 2002 was lowered to $25.9 billion from $26.1 billion. And the danger of future reductions isn't over.

"Economic softness is accelerating non-economic trends that threaten Sun and raise the likelihood that numbers may need to again be reduced," he wrote in a note to investors.

Kraemer said that Sun's channel inventories were at a three-year-high and that the situation could get even worse, due in part to equipment returns from failed dot-coms. And to add insult to injury, dot-coms that are still around have already blown their bucks on new servers and aren't likely to go shopping at Sun any time soon.

"It may take three quarters to burn through this, and new Ultra Sparc III-based servers just exacerbate the price cuts needed to move inventories," Kraemer wrote.

The downgrade really stings Sun, which hasn't had much to cheer about in the last six months. It hit a 52-week-low Tuesday and has dropped 66% since hitting a high of $64.66 on Sept. 1. Sun's shares were trading at $20.06 on

Instinet

Wednesday morning before the bell, off 9.8% from their Tuesday close of $22.25.

That's quite a comedown for a company that had been the darling of the tech world, easily beating estimates by a healthy margin and never having anything negative to say about earnings growth.

But times have changed, and the economic slowdown has really hurt Sun, which supplied the guts and bolts of the dot-com boom. Now that the boom has busted, many clients Sun used to rely on no longer exist, making growth even more difficult. Add in slowing information technology spending at older, more reliable customers, and the once blue skies turn a very dark gray.