Battered Sun, 3Com Stocks Sinking, But For Different Reasons

Shares of 3Com, which dipped below $10 last week, and Sun Microsystems, which hit a one-year low of $31.50 on Wednesday, are perhaps the most visible victims of a vicious market that began taking bites out of share prices last spring.

The two companies' share prices were eroded by failures to meet earnings expectations. 3Com revised its earnings expectations for the quarter ending Dec. 1 from between $870 and $910 million down to $785 million to $800 million. Sun's shares began tumbling on the emergence of competing server systems, rumors of accounting irregularities and reports by financial analysts questioning the company's growth potential.

Despite its unnerving dip, Sun is "in a good position," according to Jean Bozman, research director at the server group of IDC, Framingham, Mass. "Its position as a vendor not tied to Intel makes it unique, and it's way ahead in penetration into service provider accounts. Those things don't mean that Sun is immune to the same forces that are dragging down the rest of the market."

After boasting revenue growth of 40 percent and 60 percent in the previous two quarters, "Sun is getting to a point where it can't sustain that growth," says Bozman. "We expect them to grow, but the compares will get smaller as time goes on."

3Com's situation is less bright. Last week brought a warning from the company that profits and revenues would fall short of expectations, and this comes amid a shift in strategy that has customers questioning the company's focus.

"3Com didn't help its case when it reduced its product range to attack the small and midsize enterprise space, the carrier space and the consumer space," says Marina Mayes, an analyst at the Gartner Group, Stamford, Conn. "They still sell for the enterprise, but not the large enterprise. However, the perception is that they're no longer interested in the enterprise space, and while that isn't necessarily true, in this market perception is everything."

3Com's took its first hit earlier this year after a major reorganization that saw it spin off Palm.

3Com blamed its revenue shortfall on restructurings and consolidation in the telecommunications industry, and belt-tightening by mid-sized Internet service providers.

"There is a general softening of the networking equipment market," Mayes says, "but 3Com is facing some troubling issues that must be addressed. We've been predicting for some time that a consolidation is coming in the networking products industry, and 3Com might just turn out to be an acquisition target of one of its more successful competitors."