Stock of the Day:
Stock of the Day (Archive)
Jun 24, 1998
Rambus: Chip Interface Technology Sizzles
Rambus (Nasdaq:RMBS - news) was one of the hottest IPOs of last year. After cooling its heels for the past six months, the afterburners lit up again this week--the stock is up $19 or 48% in two days. The company's technology speeds the flow of data between memory and microprocessor chips, and actions by several key players in the PC industry this week suggest it is about to become an industry standard.
The Rambus news releases of the past few days read like a who's who of the PC industry. Dell (Nasdaq:DELL - news) and Compaq (NYSE:CPQ - news) said they'll ship PCs in 1999 that use the Rambus technology. Intel (Nasdaq:INTC - news) , which dominates the microprocessor market, said it has begun testing devices using Direct Rambus technology. And two major memory chip makers--Toshiba and LG Semicon--have completed testing using the technology for use in future memory chips.
Rambus has developed a unique architecture for chip-to-chip interface. This technology, which it licenses to chip makers, dramatically increases the speed of data transfer between memory chips and microprocessors. Such an increase is sorely needed because the current industry-standard architecture for DRAM (memory) chips has severely constrained improvements to the data transfer rate. As microprocessor speed has leapt ahead, a serious "performance gap" (more like a chasm) developed between memory and microprocessor chips, such that in two years Intel says a faster processor will no longer result in improved PC performance unless memory bandwidth widens.
The Rambus technology is currently being used in applications such as Nintendo video game systems, but the big payoff will be if and when Rambus-based memory chips (RDRAMs) become the industry standard for PC systems. Judging by this week's announcements, they could start collecting on that home run next year. The company is also working on markets like multifunction computer peripherals, Ethernet networking and digital TV, but the PC market is seen as the most desperate for this technology right now. Rambus has already licensed its memory chip technology to all of the major DRAM manufacturers. More importantly, these DRAM makers will likely be forced to use those licenses (and pay Rambus royalties) because Intel is planning to roll out Rambus-based chips by early 1999. Intel can effectively dictate an industry standard because it dominates the market for PC microprocessors, so memory chip makers will need to have compatible Rambus-based products if they want to be inside the same PC as Intel, which currently means about 85% of all new PCs.
The biggest risk for companies like Rambus which license intellectual property is that someone else could develop a competing technology that is better and/or cheaper. The DRAM manufacturers have been trying to develop their own methods for expanding bandwidth, but they've not yet found a better solution than the fast, small and cheap one offered by Rambus. Even if they did, they would probably have a tough time getting their competitors to license it. There is an industry consortium which is working on an open-standard solution called SyncLink, but most industry watchers doubt it will beat Rambus. Intel is in a better position than the DRAM manufacturers to establish industry standards, and for now at least, they are endorsing the Rambus technology rather than trying to outdo it.
Indeed, it is the relationship with Intel that has attracted so much investor interest and confidence that Rambus technology will become the industry standard in the next few years. Last November, Rambus and Intel entered a licensing and development agreement which facilitates the joint development of specs for RDRAM and the main memory controllers to work with the RDRAM. Once Intel puts the technology into chipsets, it's about as close as it comes to a lay-up in this business.
Whenever a hot new company hits the market, it can be tough for investors to get a sense of what a reasonable price is for the stock. A good way to look past the hype is to compare valuation ratios with its peers. Unfortunately, it will be at least a few years before Rambus hits the stage of its business where licensing revenues will give a good sense of its potential. Valuation of Rambus's unique business model is even more difficult than usual because few public companies, if any, have ever had an industry-standard technology to license on such a large scale. There are plenty of other "fabless" semiconductor technology companies which license their designs for specific products, but most are not industry standards or on a scale comparable to this.
Some analysts are using young, high-growth software companies as a benchmark for valuation because of Rambus has no inventory, limited capital expenses, 100% gross margins and gets most of its revenue from licensing. Such stocks have traded at 40 or 50 times projected earnings. Morgan Stanley Dean Witter analyst Mark Edelstone forsees earnings of more than $5 per share within five years. Hambrecht & Quist analyst Rob Chaplinsky set a 12-month price target of $100 last November and he maintains that target currently.
Rambus traded as high as $86.75 last year, an astonishing ascent from its $12 IPO in May of 1997, but since then it has drifted back to the $35-$45 neighborhood. The surge of the past two days put Rambus back at $57.50. It should be noted that a "speculative element" appears to be involved in the latest action -- nearly 10 million shares traded on Tuesday, yet the float (shares available for trading by the public) is only 3.2 million. |
