The last time I wrote here about Sun Microsystems ( SUNW) -- Sun Worshippers Are About to Get Burned -- I got a ton of angry reader mail from aforesaid Sun-worshippers. I guess I'm about to get a second load now.

Sun closed at $12.46 when that column ran on Nov. 21, 2001, and Monday it closed at $9.76. Being right is no defense, etc.

Once again I'm hearing "Sun has bottomed," "Sun cleaned it all up in the one messy quarter" and "Now's the time to pile into Sun."

Huh?

The Stock
Sun Microsystems (SUNW:Nasdaq)
Recent Stock Price: $9.76
52-Week Range: $7.52-$28.375
P/E Ratio: n/a
Market Capitalization: $31.6 billion
Float: 3.18 billion shares
Short Interest Ratio: 0.63
Institutional Ownership: 51%
Source: Yahoo! Finance

Sun reported a stinko second quarter, losing $431 million on sales up 9% quarter over quarter. In the year-ago quarter, Sun earned $423 million, so this was quite a flip. Execs pointed out that certain special charges -- for example, $511 million for restructuring -- suggested that Sun had swallowed hard and had intentionally taken a big, bad quarter in the interest of cleaning up the books and making money again going forward.

CEO Scott McNealy even said last week at Sun's analyst day that he thought the company would return to profitability by summer.

Well, good luck, Scott. But I think this focus on the financials misses the real problems: Sun is selling the wrong products, at the wrong prices, in an incredibly expensive way. In other words, the problem isn't the financials; it's the underlying business that has turned sour.

Take a look at a chart of Sun's share price. Sun's business was stalling out years ago, when the Internet came along; demand from the beginning of the Internet boom buoyed Sun, fueling dramatic growth and an even more dramatic run-up in the stock price.


Sun Setting in the West
Source: Big Charts

In effect, the Internet boom "saved" Sun.

Now, with thousands of Sun servers formerly in use at dot-coms floating around on the used-equipment market, with Sun storage systems stalling and with a determined assault from below by the likes of Dell ( DELL), Compaq ( CPQ), IBM ( IBM) and Hewlett-Packard ( HWP) on both servers and storage, Sun is like a deer frozen in your headlights.

At that analyst meeting last week, Sun showed off a new "blade" server, which is a good thing, if late; it talked about new storage systems based on Hitachi hardware, which may be a good thing; it sort of adopted Linux, while competitor IBM was embracing Linux.

The Stats
Year Revenue (in billions) EPS
2000 $15.721 $0.55
2001 18.250 0.42
2002* 12.865 -0.08
2003* 15.931 0.21
*Thomson Financial/First Call estimates.
Source: Company reports

What it didn't talk about is how much market share, and market "mindspace," it had lost. The products are wrong, and more, the prices are wrong: Sun is still the high-priced spread. Even worse, Sun maintains a high-cost selling environment, reminiscent of minicomputer sales in the '70s.

A company with about 43,000 employees today, Sun needs to cut that number to maybe 25,000 workers to bring costs in line with potential sales. But it won't, maybe can't, cut that deep.

I don't think this Sun is going to rise much anytime soon. It's not just that it's not headed back to the $50s and $60s. It's not headed back to the $30s ... and maybe, not even to the $20s. Anytime soon, that is.

Dead money.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had no positions in the stocks mentioned in this column, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour.

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