08:07am EDT 7-Jun-99 Morgan Stanley\DW (Edelstone/Cross/Gerhardy) RMBS INTC
RAMBUS: UPGRADING TO STRONG BUY - BACK IT UP AND GET ON THE RAMBUS
Rambus (RMBS): Upgrading To Strong Buy - Back It Up And Get On The Rambus Mark
Edelstone/John Cross/Louis Gerhardy (415) 576-2381
Date: June 7, 1999 Industry: Semiconductors Type:
Recommendation Change
______________________________________________________________________ Rating:
Strong Buy Price: $72 7/8 52-wk Range:
$110-$36 Price Target: $150
______________________________________________________________________ FY Ends
----EPS---- ----CYEPS---- Rel. P/E Septemb Curr Prior
P/E Curr Prior P/CYE (S&P 500) er 98A $0.28 260.3x $0.30
242.9x 581% 99E $0.32 227.8x $0.34 214.4x 594% 00E
$0.80 $1.00 91.1x $1.20 $1.40 60.7x 183%
______________________________________________________________________ Qtrly
---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ---- EPS Curr
Prior Curr Prior Curr Prior Curr Prior 98A $0.06
$0.07 $0.07 $0.07 99E $0.08A $0.08A
$0.08 $0.08 00E $0.08 $0.10 $0.11 $0.13 $0.23 $0.22
$0.38 $0.55
______________________________________________________________________ 5 Yr. EPS
Growth: 75% Debt to Cap.: 0.1% Dividend: None
Mkt Cap./Rev: NM Shares Outst.: 25.0 MM Mkt Cap.:
$1,822 MM ______________________________________________________________________
KEY POINTS - Based on our belief that Intel's 820 (code-named Camino) chipset
will be ready to support Rambus DRAM-based PC introductions before the end of
the third quarter, we have upgraded our rating on RMBS to Strong Buy from
Outperform.
- Due to the large short interest in RMBS and our belief that the risk factor
associated with the initial Rambus DRAM transition has declined, we are
increasing our 12-month stock-price target to $150 from $110.
- Intel (INTC--$53, Strong Buy) sponsored a two-day Plugfest event last week,
and most of the major Rambus DRAM manufacturers, memory module suppliers, and
top-tier PC OEMs were in attendance.
- Based on the efforts to prove interoperability at Plugfest, Intel validated
Rambus DRAM memory modules from Samsung and Kingston Technology, and we believe
that Compaq, Dell, and IBM either proved out or figured out how to solve any
remaining design issues in their Rambus-based PCs.
- Samsung has already commenced volume production of Rambus DRAMs for the
September launch, and we believe that Hyundai, NEC, Siemens, and Toshiba will be
qualified by the end of the third quarter. Furthermore, we believe that Micron
Technology will be in production by the fourth quarter.
- Despite our view that the September launch of Rambus-based PCs remains on
schedule, we believe that the recent collapse in synchronous DRAM prices will
likely promote lower Rambus DRAM prices and potentially lead to a slower
transition to the new memory architecture in the first half of next year.
- Based on a reduction in our royalty revenue assumptions, we have lowered our
fiscal 2000 (ends in September) earnings-per-share estimate to $0.80 from $1.00.
Our fiscal 1999 EPS estimate remains unchanged at $0.32, and although we haven't
released an official estimate for fiscal 2001, we believe that they have the
potential to at least triple over the expected results in fiscal 2000.
- Regardless of the speed at which the transition takes place next year, our
long-term view remains unchanged, and we continue to believe that Rambus will
report earnings of $6-$8 in the 2002-2003 timeframe. We believe Intel's decision
to integrate the Rambus DRAM memory controller onto some of its future
processors offers excellent support for our long-term expectations.
- Based on the highly levered business model constructed by Rambus, we believe
that the company will be able to reach $2 of annual earning power by the end of
calendar 2000. We expect Rambus DRAMs to be used in 35% of all PCs by the end
of next year, and every 5% of incremental PC penetration should generate at
least $0.50 of incremental earning power annually.
DETAILS
As we have articulated in numerous earlier reports, we believe that Intel's
long-term business model depends on the successful transition to Rambus DRAMs.
Without Rambus's ability to solve the ever-widening gap between microprocessor
(MPU) and memory performance, we believe that Intel's ability to move the PC
market to its higher performance MPUs will be adversely impacted. Intel is
currently shipping Pentium III MPUs with speeds up to 550 MHz, and we believe
that the company will meet or exceed the 1GHz barrier before the end of next
year.
Intel Has Pulled In The Introduction Of Its 600 MHz Pentium III.
We believe that Intel has recently decided to pull-in the introduction of its
600 MHz Pentium III from September to August. This will be Intel's first
desktop PC MPU to be manufactured on the company's 0.18- micron process
technology, and all higher-speed versions will use this process. While the
initial version of the 600 MHz Pentium III will likely be supported by Intel's
existing 440BX chipset (which uses 100 MHz synchronous DRAMs), we believe that
the 820 chipset will initially be used with a 600 MHz Pentium III that increases
the speed of the front-side bus of the MPU from 100 MHz to 133 MHz. We expect
Intel to introduce a 667 MHz Pentium III in the fourth quarter and a 733 MHz
version in the first quarter of next year, and both of them will use the 820
chipset.
.And Intel Needs Rambus DRAMs To Support The MPU Speeds Produced On Its
0.18-Micron Process
We believe that Rambus DRAMs are critical to Intel's ability to generate an
appropriate return on its 0.18-micron investment. Given the importance of
driving the Rambus DRAM transition, we believe that Intel has allocated
significant resources since the 820 chipset production delays were announced in
the first quarter, and we believe that the schedule for an introduction in
September is on track. Intel began to deliver samples of Rev. B0 of its 820
chipset to its key OEM partners during the week of May 17, and although one more
revision (B1) will be necessary to make the chipset production worthy, we
believe that Intel has solved the major problems that led to the previous
schedule delay. We believe that Intel will tape out Rev. B1 this week, and
production-ready samples should be available in July.
Our current estimates assume that the transition to Rambus DRAM-based PCs will
be slow and steady between their introduction in the third quarter and the
middle of next year. We estimate that about 1 million (4% of overall PC units)
Rambus DRAM-based PCs will ship in the fourth quarter of this year. We believe
that the penetration of Rambus DRAM- based PCs will increase to 20%-25% of the
overall PC market next year and 40%-45% in 2001. We expect Samsung to initially
be the dominant supplier of Rambus DRAMs, and if all of the DRAM suppliers
achieve their internal plans, we believe there could be upside to our estimates
in the second half of next year and beyond.
RMBS Should Advance On Expectations For Rambus DRAM Deployment And A Short
Squeeze
We believe that a lot of investor concern has centered on the status of Intel's
820 chipset and the PC industry's ability to transition the usage of main memory
from synchronous DRAMs to Rambus DRAMs. Due to this concern, RMBS has declined
34% versus a 4% increase in the S&P 500 since it reached an all-time high of
$110 on January 8, 1999. In addition, we believe that a considerable amount of
misinformation in the investment community caused the short position in RMBS to
reach 6.1 million shares (versus Rambus's float of approximately 18 million
shares) in the middle of May. Based on our belief that the Rambus- based PC
schedule is on track, we believe that RMBS will enjoy a sustainable advance
during the next few months. Given the potential for a significant amount of
short covering, we believe that the stock could challenge its all-time high
fairly quickly.
Once the DRAM market begins to transition toward the Rambus architecture, we
believe that investors will focus their attention on the long-term earning power
of the company. We continue to believe that Rambus will have earning power of
at least $6-$8 per share in the 2002-2003 timeframe. Based on our belief that
the risk associated with achieving this long-term earnings potential has
declined, we have upgraded our rating on RMBS to Strong Buy and increased our
12-month stock-price target to $150 from $110. Our 12-month target is derived
by discounting our 2003 earnings power estimate of $6-$8 per share.
The information and opinions in this report were prepared by Morgan Stanley &
Co. Incorporated ("Morgan Stanley Dean Witter"). Morgan Stanley Dean Witter
does not undertake to advise you of changes in its opinion or information.
Morgan Stanley Dean Witter and others associated with it may make markets or
specialize in, have positions in and effect transactions in securities of
companies mentioned and may also perform or seek to perform investment banking
services for those companies. Within the last three years, Morgan Stanley & Co.
Incorporated, Dean Witter Reynolds Inc. and/or their affiliates managed or
co-managed a public offering of the securities of Rambus and Intel. Morgan
Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their affiliates
make a market in the securities of Rambus and Intel. Morgan Stanley & Co.
Incorporated, Dean Witter Reynolds Inc. and/or their affiliates or their
employees have or may have a long or short position or holding in the
securities, options on securities, or other related investments of issuers
mentioned herein. The investments discussed or recommended in this report may be
unsuitable for investors depending on their specific investment objectives and
financial position. Where an investment is denominated in a currency other than
the investor's currency, changes in rates of exchange may have an adverse effect
on the value, price of, or income derived from the investment. Past performance
is not necessarily a guide to future performance. Income from investments may
fluctuate. The price or value of the investments to which this report relates,
either directly or indirectly, may fall or rise against the interest of
investors. To our readers in Australia: This publication has been issued by
Morgan Stanley & Co. Inc. but is being distributed in Australia by Morgan
Stanley Australia Limited, a licensed dealer, which accepts responsibility for
its contents. Any person receiving this report and wishing to effect
transactions in any security discussed in it may wish to do so with an
authorised representative of Morgan Stanley Australia Limited. To our readers in
the United Kingdom: This publication has been issued by Morgan Stanley & Co.
Incorporated and approved by Morgan Stanley & Co. International Ltd., regulated
by the Securities and Futures Authority Limited. Morgan Stanley & Co.
International Limited and/or its affiliates may be providing or may have
provided significant advice or investment services, including investment banking
services, for any company mentioned in this report. The investments discussed
or recommended in this report may be unsuitable for investors depending on their
specific investment objectives and financial position. Private investors should
obtain the advice of their Morgan Stanley & Co. International Limited
representative about the investments concerned. To our readers in Spain: AB
Asesores Bursatiles Bolsa SVB, S.A., a Morgan Stanley Dean Witter group company,
supervised by the Spanish Securities Markets Commission (CNMV), hereby states
that this document has been written and distributed in accordance with the rules
of conduct applicable to financial research as established under Spanish
regulations. This publication is disseminated in Japan by Morgan Stanley Japan
Limited and in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte.
Additional information on recommended securities is available on request.
Copyright 1999 Morgan Stanley Dean Witter & Co.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE |
