Morgan Stanley cuts Sun Microsystems, upgrades Dell

(Reuters) - Morgan Stanley said the server market is entering a new cycle that will drive a shift to lower priced systems, likely causing Sun Microsystems (JAVA.O) to lose market share due to its high-end server exposure, but help low-end vendor Dell (DELL.O).

Dell Inc shares rose more than 2 percent to $21.42, while Sun Microsystems Inc shares fell about 4 percent to $12.64 in morning trade on Nasdaq, after Morgan Stanley upgraded Dell to "overweight" and cut Sun Microsystems to "underweight."

The brokerage previously rated both stocks "equal weight" and has a price target of $28 on Dell, the world's No. 2 personal computer maker.

Separately, Standard & Poor's Equity Research analyst Tom Smith also cut Sun Microsystems to "sell" from "buy," citing expectations of intense competition for servers as spending on information technology goods slows down in the next 12 months.

Morgan Stanley analyst Kathryn Huberty said Sun Microsystems' server-market share and recent margin expansion were at risk as demand falls and pricing intensifies.

Dell, however, will benefit from the shift to lower-priced systems as all its server revenue comes from the low-end market and it products are priced below rivals, Huberty added.

"We believe the market underestimates Dell's market share opportunity in servers as low-end growth re-accelerates," she said. "We view Dell as a share gainer in servers over the next two years and note that this is one of the company's highest margin segments."

EMERGING SERVER TREND

Huberty said accelerated volume growth at the low-end of the server market is an emerging trend that is not yet priced into stocks.

Over the past two years, virtualization drove a shift to higher-priced systems, but this is reversing as lower-priced servers are "good enough" for many enterprises, in part due to new multi-core processors, Huberty added.

Server virtualization software allows companies to boost the efficiency of hardware, enabling a single machine to perform the work of 10 or more servers.

Huberty said she still rates Hewlett-Packard Co (HPQ.N) and International Business Machines Corp (IBM.N) "overweight," as both companies offer strong brand recognition in enterprise.

Shares of HP were trading at $44.92 on the New York Stock Exchange, while IBM shares were at $124.69.

(Reporting by Tenzin Pema in Bangalore; Editing by Himani Sarkar)