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Technology Stocks : Rambus (RMBS) - Eagle or Penguin
RMBS 114.52-8.2%1:11 PM EST
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To: Thomas P. Friend who wrote (4598)6/15/1998 7:48:00 AM
From: Shibumi  Read Replies (3) of 93625
 
I would appreciate it if someone would tell me where I'm going wrong in the following negative analysis of Rambus.

A few positive disclaimers: I am currently long Rambus. Their technology and the patent portfolio they've put together is outstanding. The fall of the stock due to panic about Merced is ridiculous -- actually, the lower end of the 32-bit chip set will need Rambus technology much more than Merced since it's the 32-bit chip sets which have less cache with which to front the memory bus. The competitors to Rambus are all quick-fix patches around existing technology -- none has the legs to move to the kinds of transfer speeds that Rambus does. And finally, I'm convinced that Intel desperately wants Rambus to win -- as they continue to fight in a price war with their competition, the use of Slot 1/2 to increase memory speed while reducing their manufacturing costs on a per-device level by decreasing transistor budget (by removing/reducing the cache) is a no brainer.

Thomas Friend has stated several times that his primary concern with respect to Rambus is that the DRAM market continues to shrink. In order to refute him, I did an analysis of this market. Here's what I found:

10/31/97 06/03/98
DRAM Market DRAM Market
1995 40.8 40.8
1996 25.1 25.1
1997 20.1 20.1
1998 25 14.5
1999 32.2 18.4
2000 41.7 24.9
2001 ---- 33.6

(Note: All data from the SIA website -- 06/03/98 numbers from a survey that SIA reported, numbers derived from growth estimates in survey).

When H&Q did their analysis at the time of the IPO, it should be noted that they used for 1995 a number of $26B for the current DRAM market and that they projected a DRAM market of $62B in the year 2000.

If we assume that Rambus will be able to maintain a royalty of 2%, and that Rambus penetration is 50% in the year 2000, you're left with a revenue stream from this royalty of $249M in the year 2000 versus $417M from the 10/30/97 SIA forecast and $620M from the original H&Q DRAM market forecast.

Now...I understand that the DRAM market follows boom and bust cycles -- but what surprised me in this analysis was just how far the DRAM market had shrunk given the latest 1998 numbers. Given this, it appears to me that Rambus is a much more risky proposition than it was just several months ago when the best forecast for the DRAM market was $25B with growth in 1999 to $32.2B.

Please someone tell me what I'm missing here.
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