Morgan Stanley downgraded Sun Microsystems on Friday, saying the computer hardware and software maker is at risk as demand shifts downstream and pricing pressure increase.

Morgan Stanley's Kathryn Huberty said in research report that the server market is entering a new cycle that will drive a shift to lower priced system.

Over the past two years, she writes, virtualization drove a shift to higher priced systems. But now she says the trend is reversing as lower priced servers are good enough for many enterprises, in part due to the emergence of new multi-core microprocessor. Huberty said this means good news for Dell, but not so good for Sun.

Huberty slashed her 2008 earnings per share estimate for Sun Microsystems to 62 cents from 78 cents; for 2009 she lowered it to 93 cents, from $1.26; for 2010 she sees 80 cents, down form $1.35.

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.

We believe the market underestimates Dell's market share opportunity in servers as low-end growth re-accelerates, Huberty 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.

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

Meanwhile, Huberty said reiterated her Overweight ratings on both Hewlett-Packard (HPQ) and IBM, as both companies offer strong brand recognition in enterprise.