Shares of

Sun Microsystems

(SUNW) - Get Report

were under pressure early Friday after Standard & Poor's cut its $1.3 billion of outstanding debt to junk status.

The action is a blow to Sun's turnaround, which had seen the stock go from $4.47 at the start of the year to a Thursday close of $5.16. The shares were recently off 20 cents to $4.96 in early Friday trading.

"The downgrade reflects weak and inconsistent profitability, and our expectation that Sun will be challenged to profitably expand its market presence," S&P said in a statement. Sun's debt was lowered to BB+ from BBB and taken off credit watch.

"Sun Microsystems has a good but not leading position (based on all operating systems) in the highly competitive global server market, a relatively narrow revenue base -- particularly in comparison to major competitors, and inconsistent profitability," S&P said. "These factors are partly offset by moderate debt levels and ample liquidity."

On Jan. 16, Sun posted second-quarter sales of $2.89 billion, down 0.9% from a year ago but somewhat above Wall Street forecasts. The company didn't provide forward guidance at the time, saying only that sequential revenue growth had been the best for any second quarter since 1998.

According to the ratings agency, Sun has more than $5 billion in cash and marketable securities, and is expected to maintain more than $3 billion over time.

"Despite continuing year-over-year revenue declines, ongoing cost-reduction efforts have enabled Sun to maintain largely positive EBITDA," S&P noted. "However, Standard & Poor's does not expect profitability to return to historical levels in the near-to-intermediate term, given fierce industry price competition and Sun's high R&D investment rate."