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Why does everyone hate Rambus? Fayad Abbasi
Rambus NASDAQ:RMBS
Technology | Quote | News | Research
Dec 29 1999
It seems everyone hates Rambus (RMBS) these days. The company has endured several delays in product shipment, the stock is down significantly from its highs in July, and shorts have taken a huge position in the stock. However, the Rambus saga is about to get very interesting.
Recent Events
Rambus has developed a technology to allow users more bandwidth access to memory. Its memory, known as Rambus Dynamic Random Access Memory (RDRAM), has been the subject of many rumors and frustration. RDRAM has helped cause two delays in the launch of the Intel 820 chipset. Apparently, Dell Computers (DELL) had already printed and sent out its catalog with the Intel 820 chipset slated as available. Needless to say, DELL representatives were none too happy with Intel about the delay. So why has Intel continued to support RMBS? Intel owns a percentage of RMBS and has incentive to see RMBS succeed. In order to optimize the performance of its latest chipset, Intel needed the Rambus technology. In performance tests comparing a 733 Megahertz (Mhz) Pentium III with RDRAM to a 750 Mhz AMD Athlon processor, the Pentium III outperforms AMD in several benchmark tests. However, the same tests with SDRAM show the AMD outperforming the Pentium offering.
In early December, the company made several innuendos on future applications of its technology in the communications integrated circuit market. While officials remain tight lipped as to the specifics (the company may have more information when it announces first quarter results on January 14, 2000), the opportunities in that field are strong for the company.
Reasons to buy the stock
It does not take huge market penetration for Rambus to deliver significant earnings growth. Royalty revenue is extremely profitable. Qualcomm (QCOM) stock has risen over 2000% in 1999 because investors are looking for large royalty revenues in future years. While the market for memory is not quite as large as QCOM?s, the earning?s leverage does exist.
Play Station II is slated to be a big hit. The Japanese product release is expected on March 31, 2000 with a US product release expected in time for Christmas 2000. Sony is expecting sales of over one million units on the first weekend of sales. If it does achieve one million sales on the first weekend, Play Station II will be the best selling game console. Royalty revenues from Sony should exceed conservative revenue estimates easily.
The Intel 820 chipset is out but nowhere to be found. While the price of RDRAM is much higher, the demand for high-end computers exceeds the current availability. As a result, Samsung announced it will double its production of RDRAM next month.
In February 2000, Microsoft Windows 2000 is scheduled for release. Product transitions, especially in memory-hungry operating systems, have lead to increased demand for more powerful computers. Based on early performance results, RDRAM is crucial for maximum performance of the top line INTC processor.
As of last month, almost 50% of the total float was sold short. With earnings to be released on January 14, 2000, good news could cause a short squeeze. See article on short squeezes.
Samsung is showing strong support for the RDRAM technology. With both Intel supporting the technology from the motherboard end and Samsung from the memory end, Rambus may be experience high volume and cost decreases before other technologies have a chance to make it to market. Samsung is looking to shift 20% of its total DRAM production to RDRAM, as opposed to other memory manufacturers? 10% commitment. Samsung is also the leading supplier of top line memory and the worldwide leader in total memory revenues.
Reasons to sell the stock
Other than Samsung, none of the other DRAM manufacturers are big fans of RDRAM. Many of the other memory manufacturers are upset because of the royalty payment structure. Nonetheless, those companies will make RDRAM if the market demand materializes.
Only the Intel 820 and 840 chipsets support Rambus at this time. The AMD Athlon, for example, does not currently support Rambus technology. RMBS needs as much market penetration as possible to help drive down unit costs and become more competitive in price. Because of the relationship between INTC and RMBS, though, it is unlikely AMD will support the RDRAM technology.
Intel is not in favor of using the RDRAM memory for mobile units. INTC has left the window open but it is unlikely to use that chipset for 2000. If RDRAM prices drop significantly, though, INTC may offer a mobile product in the second half of 2000.
The delays in the Intel 820 chipset (originally planned for release in July 1999 but only now coming out) have opened the door for other technologies. Given the price premium for RDRAM, the company must see volume production and the subsequent price decrease to keep the competition from stealing market share.
RDRAM is extremely expensive. Recent consumer pricing for 64 mega bits (Mb) of SDRAM is about $120-$130 while RDRAM is $500. Other than die-hard super performance users, almost no one will pay the premium. With the AMD Athlon alternative close in performance, the premium is too steep. The price must come down if RDRAM is to gain market acceptance.
Conclusion
One of the problems from a cost perspective is the die size. A larger die is required to make RDRAM and this results in higher costs. According to Jack Robertson of Electronic Buyers? News, ?Officials at Rambus said the 32-bank design provides fast data access speed, but requires a larger die and adds cost because of the more complex logic functions required on the chips.? However, Samsung officials are currently developing a 16-bank design, which are expected to begin sampling in June of 2000. If so, it could be in time for the introduction of rival memory, such as double-data-rate (DDR) SDRAM, and maintain its lead. Samsung officials also hope to have a 4-bank design eventually.
Ultimately, the key for RMBS is lower unit costs. If average selling prices drop, demand for the product will accelerate and earnings for RMBS will explode.
January 14, 2000 will be a big day for Rambus, When it releases earnings, we should know what royalty revenues look like for the first quarter of RDRAM shipment and what to expect over the next quarters. If the news is good, it could get very ugly for the shorts. FWD this page to:
Fayad is a semiconductor analyst for StreetAdvisor.com. He holds individual stocks in his portfolio, and may, from time to time, own or short stocks mentioned in his writings.
Copyright 1999, StreetAdvisor.com, LP, all rights reserved. Do not duplicate or redistribute content in any form without the permission of StreetAdvisor.com.
The companies, ideas, and investments discussed in this report may not be suitable for all investors. Investors should make their own investment decisions based upon their own financial objectives and financial resources, or consult a qualified professional.
Investors should be aware that the price of the securities discussed in this report may be subject to price swings that could lead to a significant loss of capital.
StreetAdvisor.com, LP employees, sources, or article submittors may have a long or short position or hold options on securities or other related investments of the company discussed in this report.
This report is for informational purposes and is not intended as a recommendation or an offer or solicitation of an offer to any person with respect to the purchase or sale of the security discussed in this report. Facts, figures, statistics, and other information is stated to the best knowledge of the writer, and are not warranted by the writer or StreetAdvisor.com, LP. This report is intended for United States citizens.
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