Hi Web Myst; Good points for owning RMBS:
(1) If Rambus gets any legal victories, it's likely to pop substantially. I'm (repeatedly) on record as stating that if Rambus really can collect 3.5% royalties on DDR SDRAM, they will be worth more than $400 per share before terribly long. (That was before DRAM dropped in price, so you'd have to reduce that to something less, I suppose.)
(2) Industry transitions from one memory type to another very slowly. The way that memory makers make money is by setting up a line to make memory and then running the line 24x7 for years. Given this fact, the transition from SDRAM to DDR is going to be a very slow one, as is the transition from RDRAM to DDR. This means that you're not likely to see quick changes to RDRAM production any time soon. That's also why the memory makers have been underproducing RDRAM, they don't want to have to switch their lines back to SDRAM / DDR soon afterwards. This really isn't so much a good point as it is a "mediocre" point, LOL.
(3) Since the memory makers are predicting that 4Q01 will be the peak production quarter for RDRAM, and that it will decline afterwards, it's pretty simple to predict that RDRAM will drop to its natural price premium over SDRAM around the end of the year or early 2002. This will actually be bad news for Rambus, as the stagnant production combined with crashing (i.e. 1/4 of current) prices will reduce royalties substantially. But the good news is that the public doesn't know what actual production is, they can only see the finished RIMM pricing. And when they see RIMMs at around a 50% premium over SDRAM, they may be so relieved at RDRAM finally getting cheap that they take the stock up.
(4) As time goes on, stocks like this end up in the hands of mom and pop types, and those guys never sell a stock with a loss, except in two conditions: (a) They get a margin call and are forced to sell, or (b) they need the money desperately and are forced to sell. [By the way, mom and pop sell stocks at a profit for the above two reasons, but also in order to buy some other stock.] Anyway, the overall effect is to keep a lot of shares of stock in the hands of very stable, very patient "investors". In addition, they keep shares in unmargined accounts (for IRAs, for instance), and so the shares aren't available for shorting.
(5) The Rambus story is a complicated one, and it isn't possible for mom and pop (or Wall Street, for that matter) to see RDRAM technology the way a design engineer does. For that reason, Rambus has been able to generate interest among people who believe that they know enough about electronics to be able to predict the next mainstream memory type. In other words, RMBS is practically designed (and the company's activity has been directed toward) getting small time investors to buy in.
(6) If someone is convinced that RDRAM is the next mainstream memory, then RMBS at the current price is a bargain. Rambus' royalty income for controllers has been suppressed by the fact that Intel doesn't have to pay for Intel's Rambus chipsets. (Maybe that contributes to why the other chipset makers have ignored RDRAM completely.) Anyway, even with the current $15 billion memory industry, 2% royalties would be $3 per share. Controller royalties would bring that to maybe $5 per share. Industry and Wall Street know that RDRAM is dead, dead, dead and zero chance of becoming mainstream, which is why the stock price is $8 per share, but mom and pop aren't sure. So a lot of people are going to think that RMBS is a good gamble. Their thoughts will be something like this: "Okay, maybe RDRAM takes over, maybe they don't. I'll put 1000 shares into RMBS, and if RDRAM takes over, I'll get $60 per share for it. On the other hand, all I can do is lose my $8 per share. So if RDRAM has a 50% chance of succeeding, this is a great bet." All it would take is the right financial adviser saying something like that to enough people, (or even to the right mutual fund manager), and RMBS doubles from here. In short, RMBS looks like a good gamble at the current price. The same gambling argument could be made with regard to the DDR royalty case (and it would be a better gamble). I know probablility theory well, and if someone offered me 10 to 1 return on a 50/50 bet I'd take it (if I could afford to lose the minimum wager), but the problem here is the estimate of the probabilities... It sure looks like RMBS is a "00" rather than an "even" in roulette terms, but not everybody knows the probabilities for RDRAM becoming mainstream or the royalty lawsuits being won.
Re the bet on the $18.84 price for RMBS: #reply-15645679 (April 11, 2001)
Good that you're only getting 100 shares. One of my principles of investing is never to break too many eggs in one omlet. Also, whenever I want to try a trade that I don't have a lot of experience with (i.e. a situation that isn't familiar to me), I knock my share count down to 100 shares or even smaller. A lot of people think that the only way to learn to trade is to trade full size, but I think they're idiots.
I'm unable to ascertain the probability of Rambus attaining success in the legal area. It sure looks tiny to me, but I'm just not expert in that area. So there's no way I'm going to short RMBS. Every successful investor / trader has a limited number of types of trade that they make, and RMBS just doesn't fall into any of my trade types. I follow the technology and the legal situation, rather than the stock. But with the stock hitting obvious "important" prices (as far as charting goes), I've been commenting on that. By the way, there was some reporter was saying that RMBS was trading at an all time low, but it's actually closed at $7.50 (after splits) which is below today's new 52-week low.
-- Carl |
