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Tickers in this Article: INTC, AMD, SUNW, DELL, IBM, HPQ, ORCL
Last July, Sun Microsystems (Nasdaq: SUNW) traded as low as $3.74. Since then, it has climbed over the $6.00 mark. The company elevated its former president Jonathan Schwartz to CEO, replacing founder Scott McNealy.

Since then, Schwartz has cut several thousand jobs, which helped Sun get close to break-even. But since January, the stock has flattened out as the market awaits for Sun's next act.

Buying Revenue
A great deal of Sun's growth over the last year comes from two acquisitions -- Seebeyond and StorageTek. The company even says in its most recent 10-Q that the most of the company's revenue improvement in that period came from the purchase of these two firms. Total revenue in the quarter ending October 1, 2006 was up 17% compared to the same quarter last year to $3.189 billion. Gross margin grew a bit less --15.5%. But, because the company was able to hold operating expenses almost flat, the net loss shrank from $137 million in the same period the year before to a loss of $64 million.

Sun's most recent financial statements leave investors with a critical question. Can Sun's businesses grow on their own or are any improvements in the company's top line dependent on buying new businesses. The strategy of growing through acquisition is not unheard of in the tech world and has worked well for companies like Oracle (Nasdaq: ORCL).

Core Business Has Several Competitors
Sun's primary business is selling servers and storage to enterprises. It loads the servers with open source Solaris software which is relatively inexpensive. It makes it money on the hardware and service contracts. The company has also upgraded its servers and industry reviews have been good. Research firms like IDC even show the company gaining share, but from a small base.

Sun's largest single problem is that its competitors are much larger than it is, have better R&D resources, more sales staff, and broad service networks. Dell (Nasdaq: DELL), Hewlett-Packard (NYSE: HPQ), and IBM (NYSE: IBM) all sell servers into the same customer base that Sun does. The bear argument about Sun is that it has too few resources to keep gaining share without cutting costs. It has a problem that is not unlike the one AMD (NYSE: AMD) has in competing with Intel (Nasdaq: INTC). Gaining market share often comes at a high cost.

A Short Runway

With its stock up so much over the last three quarters, Sun has little room to disappoint Wall Street. However, keep in mind that the quarter that ended on March 25, 2006 had revenue of $3.117 billion and an operating loss of $212 million. It is safe for investors to assume that cost cuts will allow the bottom line to improve. But, the key to Sun keeping its stock up is to show that the business has grown beyond the revenue it picked up in it two acquisitions.

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