Re: RMBS valuation, gorilladom. Here is a foolish view.From Fool Plate Special June 23, "Rambus Rides Again" (TMFPanic):
fool.com
<<Other sell-siders have taken the path of least resistance and have simply stayed away from covering the stock at all. As a point of reference, only six sell-siders cover Rambus, compared to a whopping 34 that follow the much-better-understood story of chip giant Intel (NYSE: INTC) . That should tell investors something.
Over time, human beings have developed a proclivity for hunting and gathering, for fight or flight responses, and for ensuring the long-term survival of the species. However, figuring out how to properly value an IP-based, potential hypergrowth company such as a Rambus -- or a Qualcomm (Nasdaq: QCOM) or an ARM Holdings (Nasdaq: ARMHY) -- is another matter entirely. Investors should keep in mind that such situations are still uncharted investing waters (emphasis mine). At this point, ultimate success may have more to do with luck and faith than foresight and investing acumen.>>
Truth is, when I read this conclusion, I felt somewhat pontificated to. In the same manner as some of the Wise are prone to do by suggesting that the rest of us poor slobs couldn't possibly be qualified enough to handle our own finances and better leave it to them, the experts.
My first reaction to the article was to wonder whether I had just been called a gambler (the success based on luck part) or an idiot (the faith part) for investing in Rambus. Now just as in any other aspect of life, I admit that in investing too luck can sometimes play a role. And while only a fool would turn Lady Luck away from his door, it's precious little to hold on to, when your share price plummets from 470 to 150.
To the second "success" factor: faith.
Now I've read that faith is supposed to be able to move mountains, but last I heard neither the Pope nor the Dalai Lama were hiring out as investment mountain movers. So maybe we shouldn't count on this one either. What does that leave us with? Well, I thought why don't we try to measure Rambus against The Motley Fools' investment criteria? Given both the nature of its business model and the company's development stage, the Foolish investment strategy that would seem most appropriate to measure against would seem to be the Rule Breaker criteria. This is just a quick and dirty attempt, so if anybody wants to add to it, don't hesitate. Here goes:
The rule breaker criteria are:
- Top Dog and First Mover in
- an Important, Emerging Industry,
- managed and backed by outstanding people,
- that has a sustainable competitive advantage,
- possesses relative strength in numbers and brand,
- and has recently been called overvalued by an important constituent of the financial media.
Important, emerging industry
Feeling very confident about Rambus' performance against all the other rule breaker attributes (see below), I must admit that I hadn't spent too much time thinking about how it would qualify for this first and most important criterium. For a brief moment, I confess, I wavered. Since memory chips - although certainly important- are hardly an emerging industry, I appeared to be stumped before even getting out of the starting gate.
However, my brief moment of doubt passed as I recalled that serving coffee is not exactly revolutionary in and of itself, either. Yet, the Fool's Rule Breaker portfolio holds Starbucks and, I believe, rightly so. What's driving Starbucks' success is the concept of how and in what atmosphere they serve you their brew. We'd be well over one hundred years late, if we wanted to call serving coffee an emerging industry.
What is emerging with Rambus' technology is a new and far improved way of transfering data between chips. A technology that is so compelling in the crucial field of memory chips that Intel and almost all of the major memory chip manufacturers signed up for it quite some time ago. In other words, Rambus is in control of a technology that will touch all our lives.
I'd say Rambus passes the important, emerging industry test with flying colors.
Top dog and first mover
Is Rambus the Top Dog in memory chip technology? I must admit that I am probably not the most qualified person to answer that question (no technical background). Instead of me giving you my two cents, let's ask some people who make a living using the technology. How about we call Hitachi and ask them why they just cried "uncle" and signed a licensing agreement for Rambus technology? Was it because they felt lucky, you think? Now let's get a second opinion. How about asking Toshiba if the reason for their signing a licensing agreement with Rambus last week was a matter of faith? Or could it have been that they acknowledged that Rambus has developed crucial technology that they (Toshiba) have to have?
How about Rambus as the first mover? Maybe the fact that Intel declared over a year ago that all its future high performance chips would be using Rambus technology was a give-away that Rambus was emerging as a top dog and first mover with its new technology. The Toshiba and Hitachi licensing agreements have just effectively made it the only mover!!
Outstanding People and Smart Backing
Being able to develop the technology that Rambus holds, qualifies for outstanding technical expertise. As for the business side: anybody that's paid attention can't help but be impressed by the way Geoff Tate and his crew keep delivering on their promises like clockwork. Kudos to rchampoux for a great post on this subject.
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Smart Backing? Well, if you were developing technology for data transfer between chips, who would be your ideal backer? Your dream chief cheerleader? You've got it, none other than Intel itself! Obviously the folks at Intel know what they are doing and when they are staking a not inconsiderable portion of their future success on the viability - both technical and economical - of Rambus technology, then you better believe that they are relying neither on luck nor on faith but rather on the shrewd business judgment.
Sustainable Advantage
One way to create sustainable advantage is by means of patents. What the Toshiba licensing deal indicated last week, the licensing deal with Hitachi has confirmed: Rambus patents are rock solid and untouchable, which makes for an unassailable competitive advantage. The beauty here is that not only does Rambus have the patents on its own version of next generation technology, RDRAM, but it also holds patents on key components of what has been touted as a (the only) potential competitive technology, DDR RAM. A fact that was very convincingly demonstrated by Hitachi electing to license technology from Rambus instead of fighting it out in court.
Relative strength in numbers and brand
I don't have the relative strength index of Rambus stock but with how those shares have exploded over the past 12 months, there is no doubt that they pass this test without even breaking a sweat.
As to brand, they are known where it counts: Intel and eight of the world's top ten memory chip makers are Rambus licensees. And with the events of the past two weeks, the rest can't be far behind.
Recently been called overvalued
Too many to mention.
So Rambus sails through all the rule breaker criteria with flying colors. What more could one want? Well, you could say that its business model is relatively untested. So what? So were those of AOL and Amazon, so is that of Celera, all worthy rule breakers. Like these three Rambus passes the criteria AND it is backed by the industry's gorilla, Intel, AND it has unassailable patents that everybody will need to license. If you want to call this investing based on luck and faith, then consider me one of the very luck ones who's got religion! In my book however, it's a question of doing your homework and putting your candidates to the test, of making up your own mind and not listening to those who would offer you nothing but the fear of getting into "uncharted investing waters". It's in those uncharted waters where the big profits are found! |
