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Technology Stocks : Rambus (RMBS) - Eagle or Penguin -- Ignore unavailable to you. Want to Upgrade?

To: Mohamed Saba who wrote (37133)	2/15/2000 1:52:00 PM
From: Mohamed Saba	Read Replies (1) \| Respond to of 93625

This is so much fun to watch: 137.25 Oh well, make it 138 1/4

To: Mohamed Saba who wrote (37133)	2/17/2000 8:21:00 PM
From: jhg_in_kc	Read Replies (1) \| Respond to of 93625

To Mohammad and to the Thread, I got this detailed question about RMBS valuation and its future and didn't know how to answer. ANy thoughts, ONE AND ALL? Hello jhg, re: RMBS, OK, so let's assume RMBS is a "toll bridge", and will be successful. How do the numbers work? I understand that they'll get a 1.5% royalty (something that memory mfrs. are resisting fiercely - I don't understand that, but that is an interesting topic for another day). Let's say what they've got (RDRAM technology) is good for 3 years, or 5 years (or you propose some other reasonable periods). Let's assume that 75% (dollar volume) of all RAM worldwide is manufactured with the RAMBUS technology (again, please propose a better figure if you want). What's the size of the worldwide memory market? I'm on really shaky ground here, but let me SWAG it at $25B (I'm very much in need of correction here!) Let's assume they make a net profit margin of 85% on their royalties, and they pay 40% tax on this (i.e., they get to keep 60%) Under my assumptions, they'll get $25B * 0.75 * 0.015 * 0.85 * 0.6 = $143M every year. If they're good for three years, this will deliver $430M of value to the company. If it's good for five years, then the figure is $720M. Unless RAMBUS comes up with an encore, then RDRAM is in a sense a sort of "lump sum" asset (note that I have not applied any discounting to arrive at a present value -- this is intentional, in order to bias my results towards giving an "upper bound" sort of figure). Now I'm sure that they have some pretty smart guys working for them, so they probably have a pretty good chance of coming up with new and better products -- however, that is very different than the "money in the bank" that RDRAM might be. One way of looking at paying $150 per share today is that you're paying $3610M for a company that has either $430M or $720M worth of "bankable RDRAM royalty value", plus $2890M to $3180M (let's call it a round $3B) of "other" value. So unless I'm way, way off base with my back-of-the-envelope estimate of the amount of value that a fully successful RDRAM can deliver to RMBS shareholders, it looks like the bulk of the valuation in RMBS stock must be attributable to "other than RDRAM" factors. In other words, buying RMBS today in the hopes of selling it for a significantly higher price in the future has very little to do with the commercial success of their RDRAM technology. Even if they are 100% successful with RDRAM, that doesn't appear to come close to justifying the present stock price. Even a toll bridge can be overpaid for. - Daniel