Sun faces dark times as users stockpile servers

Shares in Sun Microsystems dropped over 11 per cent in New York and Dusseldorf last night in anticipation of bad news in the company's scheduled mid-quarter update tonight.

This morning the shares stood at $19.31 on Nasdaq and E21.70 (£13.63) on the Dusseldorf exchange. The share move was sparked by yesterday's downgrade by brokers Merrill Lynch, which changed its rating from 'accumulate' to 'neutral'. Sun has consistently grown at a rate of 30 to 40 per cent per year and looks like continuing, at least for this quarter. However, according to Merrill Lynch the company has wholesale inventories at a three-year high because companies that stocked up on servers for Y2K have more than enough capacity and failing dot-coms have clogged the secondhand market - with some machines still in the original packaging. The brokers estimate that this backlog will take up to nine months to shift. It is also worried about what it sees as weaknesses in Sun's data storage line, the current hot market. Sun has always been conservative in its accounting and is sitting on large cash reserves.