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Behind Sun Microsystems' Recent Strength

With its old fan base vanquished, value holders focus on cash and its AMD partnership.
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Sun Microsystems

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has been defying the Cassandras for the last two weeks, staging a rally that has pushed the stock up 13% from its intraday low of $3.64 on May 10. A sharp decline from Sun's February peak created appealing value for some investors, but skeptics contend the company's fundamentals don't support much more upside.

"This company has been priced like it is going out of business, when in fact it's getting stronger," said Mark Stahlman, managing director of Caris & Co., which does not hold a position in Sun and has no investment banking relationship with it.

However, Sun's trading volume over the past 10 days has been 15% below its 90-day average of 44 million shares, which could indicate that the rally isn't sustainable. Richard Williams, director of research for Garban Institutional Equities, said that when the stock last rallied in January, volume was double and even triple its average at the time.

"If this were a significant rally, it would be logical to expect a significant change in volume," he said in an interview.

Indeed, although the stock continued to gain strength on higher-than-average volume of 53 million shares Tuesday, its upward move on a generally strong day for technology issues was just 14 cents, or 1.5%, to $4.12, closing off its intraday high of $4.20.

Sun's long-term slide is an old story. The once highflying maker of powerful server computers has yet to recover from the implosion of the dot-com boom, and has lost market share to companies selling cheaper servers powered by standard


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processors running


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More recently, the company has broadened its enterprise software offerings and has had some success selling a

cheap operating system and office software for desktop PCs.

Sun has lost money for nine of the last 10 quarters. It broke even on a per-share base in the 10th, the March quarter of 2003. Annual revenue, meanwhile, declined from $18.25 billion in 2001 to $11.43 billion in 2003, and analysts polled by Thomson First Call are expecting revenue of $10.96 billion in fiscal 2004, which ends in June. Quarterly revenue has not increased on a year-over-year basis for at least five quarters in a row.

Why the stock rallied this month is unclear. The most positive news about Sun to hit the wires recently came on April 2, when Microsoft settled a long-running legal spat with Sun to the tune of $2 billion.

That day's rally was a short-lived affair, and the stock resumed its slide soon after.

Cody Willard, a partner in a buy-side firm and a contributor to's

Web site, said of Sun's May rally: "It looks like the weak hands and scaredy cats who wanted to sell have gotten out. Now it looks like someone has decided to build a position."

Willard, who is long the stock, said he is not aware of any fundamental catalysts driving the stock. But he is generally encouraged by Sun's partnership with

Advanced Micro Devices

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, a seller of cheap but powerful microprocessors, and the company's large installed base.

"This company has a lot of cash; it's not going away," he said. At the end of March, Sun reported that it had $1.5 billion in cash and another $866 million in short-term securities.

Stahlman, one of the leaders of the Sun bull rush, said the turnaround began to be evident in the December quarter when the company cut its year-over-year per-share loss by 94%, and noted bookings strengthened in the March quarter. Fair value for Sun, he said, is $6 or $7 a share, a long way from its current price on a percentage basis but a far cry from its bubble era peak.