A couple of months ago, I mentioned that the Oracle/Sun combination was approaching duopoly status in the data center. At the time, Sun's stock price was still too high to qualify it as a bargain. Still, I figured when it fell below its two-year average, it would make the cut for the CU fund. And in two months' time, the stock fell 20 points before leveling out at $30 a share at the time of this writing, down from a high of $65 a share in October, 2000.
You know investor confidence in tech is at a three-year low when one of the most profitable high-tech companies sees this kind of a slide. As with most of the bargains I have profiled in this space the past few months, Sun suffers from unreasonably low investor confidence, despite the fact that 13 of 23 analysts list it as a Strong Buy and nine out of the 10 remaining give it a Buy rating. Suffice to say I think the analysts are wise to ignore poor investor confidence at this time. While Sun may hover around 30 for a couple of months, I expect it to hit the mid 40s in 2001, making it a solid addition to the fund.
In addition to its near-monopoly position in the high-end server market, Sun is on the cusp of greatness in two less traditional areas for the company. Its Java language and Java Virtual Machine (JVM) developments are finally reaching maturity. And as Linux is generating interest in talent pools around the globe, Sun's Solaris is now more attractive to midsized companies.
While Java has suffered from unrealistic expectations, it is now the undisputed king of enterprise and Web programming languages. While some shops still use C++ for heavy lifting, most rely heavily on Java. And aside from a general move toward scripting languages, I don't see a viable competitor for Java for some time. This means more royalties from JVM, which has been a minor revenue stream until now.
While Java never quite lived up to its write-once, run-anywhere hype, it is supremely portable in another sense. With the emphasis on time-to-market and programming speed, shops rely more and more on reusable components like Java Beans to quickly get programs up and running. And Java is platform-independent in another sense: It is ideally suited as a middleware language because of its ability to weld applications between many platforms and architectures. Add to this the relative ease of learning the language, and it becomes the language of choice in shops that rely on some custom applications for mission-critical functions.
One of Sun's weaknesses over the years has been a reliance on just two market segments-the high-end server and workstation markets. While it is hard to beat in data centers and high-volume e-business infrastructure, the lack of available Solaris talent scared midsized companies away; the total cost of ownership was affected as much by the high cost of Sun's products as by the high cost of talent to work with them. Because most of the growth in IT can be found in small-to-midsized companies, Sun has been a relatively slow-growing company, at least until the data-center building boom. But as techies are becoming more Linux- and Unix-savvy, talent is less of an issue. And Sun has also addressed its low-end offerings, making midsized growth companies a better fit for its products.
The result is a faster-growing company that also has high margins on the high end, and a good long-term future with Java. With companies like Sun in the CU fund, I'm confident I'll see a 20 percent return during 2001's lean times.
