Since the beginning of this year, shares of Sun Microsystems [NASDAQ:SUNW] have been trading in a relatively wide range, between $25 and $35. Despite the fact that the company has delivered a 58 percent year-over-year earnings growth performance and the 2001 earnings outlook according to company officials is still considered to be relatively good despite a macroeconomic slowdown in business, Wall Street seems to be overly concerned about Sun's "future" growth.

Based upon our analysis, we believe that the "future" outlook for Sun Microsystems remains solid as the Sun Enterprise Server continues to be the industry leader. The Sun Solaris contains unique features which are critical for the net economy including clustered file systems and global network services. Both features are not offered by any of Sun's competitors. The world's largest auction site, eBay, with over $US 4 billion in gross merchandise sales last year, is presently powered by Sun' s servers.

Sun's Java Enterprise Edition (J2EE) and the Micro Edition (J2ME), which allow wireless businesses to develop applications for consumer and embedded devices, have been chosen by InfoWorld magazine as "Technology of the Year 2000".  In early February of this year, Sun is planning to unveil the details of Sun's "Brazil" Web framework which will enable programmers to build applications via the Internet. From our perspective, Sun Java  will continue to gain more popularity among application developers as the programming language of choice for wireless technology applications.

The recent announcement between Sun and AOL Time Warner to develop next-generation Internet software to allow users to access the Internet through devices ranging from PDA to Web televisions and cell phones, confirms our belief. According to Bloomberg, the AOL deal also includes purchases of Sun's services and equipment valued at $900 million. As industrial giants, including AOL and eBay, continue to purchase Sun's products and services, other smaller players could soon follow.

In contrast to the overall NASDAQ market showing negative sentiment to be somewhat bottomed out in mid- January, Wall Street investors still remain extremely pessimistic on Sun Micro. We believe that persistent weak macro economic environments as well as a slew of Wall Street analysts' negative views on the company outlook could be partly responsible for the observed Sun negative sentiment.

Earlier this week, Mr. Tom Kraemer, Merrill Lynch's hardware analyst, criticized the company during an interview with CNBC, the financial news network of NBC, that some of his contacts were telling him that the company (Sun) will not be introducing a mid-range server product at its analyst meeting in San Francisco on February 5.  Mr. Kraemer's comment drove nervous Sun investors to a big sell-off and the share price dropped as much as 5 percent during mid-day trading.

Merrill Lynch's comment, however, was denied later by Sun's Spokeswoman, Ms. Elizabeth McNichols, in an interview with Reuters. "Everything is on track... We never said we were introducing the new servers at the analyst conference... We're not coming out with them at the conference, and we're not going to indicate the exact date that we're coming out with them, for competitive reasons, primarily." added Ms. McNichols in the Reuters' report.

Based upon our analysis, investor negative sentiment has contracted Sun's P/E multiple from the peak in the mid-130 down to now below 50. We believe that the P/E multiple could re-expand to the mid-range level, which is about 75, if the macroeconomic environment shows some signs of improvement, which allows the company's top and bottom lines to resume its growth path. Under the assumption that Sun can achieve earnings growth of at least 25 percent this year, our investor sentiment model suggests that Sun's share price could rise to $60 in the next 12 months. 

Our "growth" P/E model, showing SUN's growth P/E multiple (defined as P/E multiplies by earnings growth) at an unprecedented level below one, also suggests that SUN's shares could present an extreme value for long-term "main-street" investors.