Sun and H-P Join the Net-Stock Race

While neither company is a pure Internet play, it looks like Sun's taken an early lead.
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At the beginning of the Internet revolution, when the medium was nothing more than a back country road,

Sun Microsystems

(SUNW) - Get Report

and

Hewlett-Packard

(HWP)

were figuring out how best to tackle this new opportunity. Sun focused on its Java programming language and its SPARC workstations, while H-P developed a handheld device, something akin to

3Com's

(COMS)

Palm Pilot, and bought

VeriFone

in 1997 for $1.3 billion for its Internet security product lines.

While Sun's plan has been a boon, H-P's has fallen flat.

"H-P had one of the oldest handheld Palm Pilot-like products on the market," says Seymour Merrin, president of

Merrin Information Services

, a high-tech consulting firm. "But the company never recognized this as a hardware business. H-P should have had the

handheld device market wrapped up by now."

Since last October, Sun has convinced Wall Street that it is a leading player in the Internet age. For years, Sun has made money by producing Unix servers, which has proved to be a solid business. But now the gold dust of the Internet has fallen on Sun. The growth of the Internet and the proliferation of corporate Web sites have benefited the company, which in its advertising campaign claims to be "the dot in dot-com." In the past six months, Sun has become one of a select group of tech companies considered to be Internet-like stocks in the eyes of investors. Since last October, Sun's stock has shot up 243%, while H-P's stock has climbed 43%.

"Expect Sun to become more and more like an Internet stock," says Steven Milunovich, an analyst at

Merrill Lynch

who raised his price target to 170 last week. This means Sun will probably have higher peaks and deeper valleys just before and after future earnings seasons. Merrill has done no recent Sun underwriting. "Once they start trading like Internet stocks," says Amir Ahari, a senior analyst at

International Data

, "they keep trading like them."

While Hewlett-Packard talks the Internet game, the chatter has yet to translate into real revenue growth.

On Tuesday, CEO Lew Platt took a stroll on the

New York Stock Exchange

and talked up the company's PC business. H-P launched a $100 million Internet ad campaign last month but has not made much headway so far. The company says it's looking to "write the second chapter of the Internet." Ann Livermore, the new CEO of H-P's Enterprise Computing Solutions division -- one of four segments of the refurbished company -- is expected to be the main author of this chapter, and H-P shareholders hope she's a quick writer.

Already, Livermore has

begun discussing the company's eServices Internet strategy with Wall Street and engineered a three-year, $300 million deal last week with corporate software developer

BEA Systems

(BEAS)

to further its business-to-business e-commerce strategy.

So far, however, the campaign has not persuaded the market that H-P can position itself as an Internet player. The stock is up only 2% since it launched its Internet initiative. "A new CEO with a new-sounding Internet vision is needed here," says one money manager who requested anonymity and has a "tiny" long position in the stock. "Right now, H-P's eServices Internet vision seems unoriginal."

Vision is one thing, and revenue growth is another. In the most recent quarter, H-P's sequential revenue rose 1%, while Sun's shot up 14%. "We have reached the sweet spot of Internet computing," says Michael Lehman, Sun's CFO. "And now the future is in our hands." For H-P, the future lies in the hands of the new CEO.