McNealy pushed Sun, which lagged competitors such as EMC Corp in the high-end storage market, to close the gap by teaming with Hitachi Ltd. He's also revamped Sun's server line with a speedier chip called UltraSparc III.
"They made the investment in pretty challenging times, so when revenue growth does kick in, it's going to be great," said Sunil Reddy, portfolio manager at Fifth Third Bank, which owns 1.75 million Sun shares.
Product delays
Other analysts and investors said Sun moved too slowly in introducing UltraSparc III into all its server products. IBM, which introduced its Regatta server late last year, has had an easier time selling the high-end Unix machine because it took Sun 12 months to complete the transition, they said.
"Sun did hand the ball back into IBM's court," said Gartner research director George Weiss, who estimates Sun was nine months behind schedule. That could be a costly mistake, now that Sun is trying to win business from Standard & Poor's 500 companies, where IBM has been selling for years, investors and analysts said.
Sun's focus on machines that don't work with competitors' products may turn into a liability, some analysts and investors say. As Microsoft and Intel make inroads in servers, customers want to buy gear that will work with those machines.
Sun's hardware business might also go the way of desktop companies such as Gateway Inc and Compaq Computer Corp, which have watched profits disintegrate as price competition heats up, forcing them to lower prices.
"At some point [McNealy] is going to have to compete on price, and I don't think he's addressed that yet," said Kevin Fujimoto, an analyst at Banc of America Capital Management, a Sun shareholder with US$280 billion under management.
IBM `no threat'
McNealy responds that IBM isn't a serious threat. The Armonk, New York, company's product line, which includes the Linux and Unix operating systems, mainframe and server computers and other kinds of software, is too varied to work well together, he said.
McNealy also dismisses predictions that Intel-based servers will steal business from Sun in enterprise computing. In the market for 64-bit servers, which process data in chunks twice as big as standard 32-bit machines, he says Intel and Microsoft are far behind.
"They don't play in the 64-bit arena at all, and who knows when they will?" McNealy said, adding that sales of his company's low-cost Sun Fire V880 servers, which compete against machines running on Intel chips, are strong.
IBM and Microsoft will have trouble winning accounts because they compete with their customers in providing Web services, McNealy said. He also still insists that computing is migrating from desktop machines toward central computers, an area where McNealy said Sun is unbeatable.
"Time is going to solve this problem," McNealy said. "It's just predicting when and how and in what way."
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