Rambus: KARB Analysis
Good post by xerohype of Motley Fool, quite long and detailed.
AzLuke
boards.fool.com
RMBS KARB Analysis
See this post for NEW KARB criteria:
boards.fool.com
A. Top dog, first mover, in an important, emerging industry that is
currently in the Tornado (hypergrowth), or is in the early stages of
Tornado/hypergrowth growth. (Most of the signs of Tornado
formation/growth as laid out in the Gorilla Game FAQ must be
met; refer to item #12 in this post:
boards.fool.com
RMBS is a designer of random access memory, they hold key patents in
RDRAM, SDRAM and DDR SDRAM essential to the manufacturing of
these modules. They license their technology to the memory-makers
gaining royalty income from their intellectual property.
From their Yahoo! Profile:
biz.yahoo.com
Rambus Inc. designs, develops, licenses and markets high-speed
chip-to-chip interface technology to enhance the performance and
cost-effectiveness of computers, consumer electronics and other
electronic systems. The Company licenses semiconductor companies to
manufacture and sell memory and logic ICs incorporating Rambus
interface technology, and markets its solution to systems companies to
encourage them to design Rambus interface technology into their
products. The Company's technology cost-effectively increases the data
transfer rate, or memory bandwidth, allowing semiconductor memory
devices to keep pace with faster generations of processors and
controllers, and thus supports the accelerating data transfer requirements
of multimedia and other high-bandwidth applications.
The thing that differentiates Rambus' designs over commodity RAM is the
speed of their interfaces, controllers. It makes no sense to make faster
and faster processors if the bottleneck of RAM speed prevents you from
seeing any speed improvements in your real life applications. RDRAM
aims to cure these bottlenecks.
This great post by überRMBSFool jasonxsmith expains the difference
between RDRAM, SDRAM and DDR SDRAM, and how RMBS fits
into all of it.
An excerpt from his post:
Rambus gets about 2% from every sale of an RDRAM chip. They
make about 3% to 5% on the sale of every controller chip that
interfaces to RDRAM (the cost of chipsets is a minor concern
though). This is a given. The contracts are in place already.
Rambus also claims they have patents which apply to SDRAM and
DDR. The royalties are about 1% for SDRAM and 3% for DDR (since
that is considered to be a competing technology). This is still in
dispute, although it looks very much like everyone is going to have to
pay. Rambus appears to be very confident that they can win in court,
and have already moved towards litigation in several instances.
Hitachi, Toshiba, and OKI have agreed to pay the royalties, and
Rambus is either suing or in talks with Infineon, though we are
unclear on the progress there.
Rambus stands to make 1.5% to 2.5% of the revenues on 100% of
the DRAM sold worldwide. If the industry grows as expected for the
next 5 years, that number will be somewhere in the $60B to $100B
range. Run the numbers, compare that to a $7B market cap, and
rejoice my child, for you have found one of the most undervalued
stocks in the market!
Remember, this is based on DRAM sales alone, and this information
is pretty easy to quantify. Now add to that the other applications
where Rambus technology is going to be necessary, and the picture
gets even better. How much better? Nobody knows, except insiders,
and they are not talking. Rambus is working deals now.
RMBS as a Rule Breaker
jasonxsmith makes a good case in this 3/4/00 post
boards.fool.com
Tom Jacobs (TMFTom9) concludes that RMBS cannot be a Rule
Breaker because it lacks a sustainable advantage:
fool.com
I would dispute that, RMBS has the makings of a young Gorilla, and as
such they don't always play nice. Yes, RMBS antagonizes its customers,
but the thing is that those same customers need RMBS' technology to
survive. As long as RMBS' patents hold they will continue to serve as toll
collector in the industry.
Top Dog:
Rambus is the only DRAM licenser I can think of, they are the undisputed
top dog in this area. Intel is basing their next architecture on RDRAM
specs.
First Mover:
Rambus has been developing its RAM designs since the early 1990s.
Rambus Inc. was founded in 1990 by Dr. Mike Farmwald and Dr. Mark
Horowitz, foremost experts in electrical and computer engineering. It is
the first mover in terms of RAM intellectual property and it is vigorously
defending its patents to assure its dominance.
RMBS as a Gorilla:
See this RMBS Gorilla summary by rel4490
Message 12880620
also see this TMF post by nilocp that lays out the RMBS Gorilla
characteristics:
boards.fool.com
B. Sustainable advantage gained through business momentum,
patents, visionary leadership, high barriers to entry, and high
switching costs.
Business momentum:
RMBS is showing a great deal of business momentum as RAM makers
capitulate and accept licensing agreements with RMBS.
Samsung was the latest one:
fool.com
Samsung joins Toshiba, Oki, NEC (Nasdaq: NIPNY) and Hitachi
(NYSE: HIT) as companies that have reached patent licensing
agreements with Rambus. Those agreements came after Hitachi
capitulated in a lawsuit filed by Rambus asserting its patent rights.
Samsung's addition to that list is huge. It is the world's leading
DRAM supplier, with revenues of $4.8 billion and 20.7% market
share in 1999. How much money does that mean for Rambus? The
companies did not reveal precise terms of the deal, but Rambus
typically seeks to collect about 1% of SDRAM revenue and 3% of
DDR SDRAM.
From that article:
Global DRAM Sales | RDRAM, SDRAM
1999 ranked by % | and DDR deal
----------------- --------------------
1. Samsung 24% deal
2. Hyundai 20% no deal, lawsuits
3. Micron 17% no deal, lawsuits
4. NEC 10% deal
5. Infineon 8% no deal, lawsuit
6. Toshiba 8% deal
7. Mitsubishi 4% no deal, no lawsuit
8. Fujitsu 3% no deal, no lawsuit
9. Hitachi 3% deal
10. Oki 2% deal
-----
TOTAL 100%
Rambus now has license agreements for 47% of the sales among the
top-10 DRAM makers. As Tom noted in his story on the Micron suit:
fool.com
Companies that don't come to an agreement with Rambus run a
grave risk: They could lose their ability to manufacture DRAM at all.
With more manufacturers signing up and the downside so great,
Hyundai, Micron and others are ever more compelled to play ball.
NEC capitulates:
fool.com
The Fool duel for RMBS makes some great points in this regard, read
TMFTom9's Bull argument (and if you must TMFOak's Bear argument):
fool.com
How Rambus makes money
Rambus doesn't actually make RDRAM, though its engineers
developed and patented the technology and are busily advancing it --
even for use in switches and routers for optical networking.
Rambus's patents are key: They are legal 20-year monopolies on the
invention backed by the U.S. Patent and Trademark Office.
-snip-
Rambus licenses its technology to memory makers. It even provides
engineers to help a licensee implement it. The memory makers then
sell to original equipment manufacturers. The company then earns a
royalty payment generally based on unit sales of the product
containing Rambus's stuff. You can check the earlier links for more
information, but we're generally talking 2% to 5% per chip, in a
DRAM market estimated to grow from $20-something billion today
to between $60 billion and $100 billion in the next three to five
years. Not peanuts. Rambus's success in this market depends on
market acceptance of RDRAM versus SDRAM and any other DRAM
competition.
-snip-
Rambus asserts that currently dominant SDRAM and the promised
DDR SDRAM use technology that depends on Rambus's patents, and
any failure to pay Rambus royalties on SDRAM and DDR is illegal
patent infringement. Read it again.
This is a big, fat, hairy, monstrous deal: Rambus is negotiating with
DRAM makers (and sometimes suing them) to receive a royalty on
every SDRAM, DDR SDRAM, and RDRAM chip. It is claiming that its
patents cover 99% of the DRAM produced today and likely to be
produced in the next few years. If Rambus succeeds, then RDRAM's
technical superiority, price disadvantage, or fashion awareness
matter not because Rambus gets paid for practically everything
DRAM. Do the numbers: Rambus is reported to charge a 1% royalty
for SDRAM and 3% for DDR. Estimate 2% of a $60 billion to $100
billion DRAM annual market in three to five years, and you have
$1.2 to $2.0 billion for Rambus. This is why debt-free, leanly staffed
Rambus could be called undervalued at its current $7 billion market
cap, without accounting for any Rambus advances in its technology
for the computer market or any royalties for its technology used in
networking products.
PATENTS
Patents are the life-blood of Rambus, without them the company would
be worth nothing. I think the patent count now stands above 90.
From the latest 10-K (filed 12/23/99):
The Company has an active program to protect its proprietary technology
through the filing of patents. At September 30, 1999, the Company held
62 United States patents on various aspects of its technology, with
expiration dates ranging from 2010 to 2019 and had applications pending
for an additional approximately 90 United States patents. The Company's
United States patents do not prevent the manufacture or sale of
Rambus-based ICs abroad. At September 30, 1999, the Company held
ten foreign patents and had an additional 36 foreign patent applications
pending in Taiwan, Korea, Japan and various other jurisdictions. In
addition, the Company attempts to protect its trade secrets and other
proprietary information through agreements with licensees and systems
companies, proprietary information agreements with employees and
consultants and other security measures. The Company also relies on
trademarks and trade secret laws to protect its intellectual property.
"C. Excellent Growth Metrics"
RELATIVE STRENGTH:
RMBS' Relative Strength in the past 12 months, according to
www.moneycentral.com, is 98 (as of 11/22/00). Makes it easily past this
hurdle. According to IBD (as of 11/21/00) RMBS had a RS of 92.
2 points.
Here are some notes from Tom Jacobs on the latest quarterly earnings
release:
fool.com
For the fourth quarter of its FY 2000, the company earned $0.09 per
share, a 113% increase over the third quarter, and an eye-popping
285% more than 1999's fourth quarter. Earnings for the year
clocked in at $0.20 per share, or 147% over 1999. These numbers
KO'd the consensus estimate of $0.06 per share for the quarter and
$0.17 for the year
-snip-
Revenue numbers further show why investors have assigned a
soaring valuation -- about 300 times year 2000 earnings -- to the
Bus: Quarterly revenues added up to a record $26.9 million, 119%
over last year and up 52% from last quarter. For the full year,
revenues climbed 67% from 1999 to $72.3 million.
-snip-
CEO Geoff Tate noted on the conference call, with justified pride,
that the company's cash balance increased $35 million to $132
million, deferred revenue from $31 million to $48 million, and that
accounts receivable were a measly $68,000 -- yes, 68 thousand
dollars. No debt, either.
RMBS has now officially entered into the tornado, with hypergrowth as
memory-makers enter into agreements to license RDRAM, SDRAM and
DDR SDRAM.
SALES GROWTH (numbers in thousands):
YoY (TTM):
Sep 1999 - Sep 2000: $72,311
Sep 1998 - Sep 1999: $43,370
That's a growth of 66.7%.
But, hold on, royalty revenue (not contract revenue) is the real driver of
earnings and future growth, that went from $8,017 to $32,628, a
whopping 407% growth yoy in royalty revenues (now that's
hypergrowth!)
QoQ (3 mo):
Sep 2000: $26,908
Sep 1999: $12,305
This is growth of 118.7% for all revenue, for royalties the growth is even
more dramatic from $1,675 to $19,921, for a growth of 1089% (yes the
numbers are small, but the RAM market is about $20 billion and growing
at a healthy clip).
2 points.
Sequential (TTM):
Jun 2000: $17,760
Sep 2000: $26,908
That's a sequential quarterly growth of 51.5%, for royalty revenue the
sequential growth is more dramatic at 203%!!!! The best thing is that the
royalty revenie carries gross margins of 100%.
2 points.
"D. Clear signs of solid execution by a strong management team;
Value chain in place or shows clear signs of developing (eg.
alliances, joint ventures, partnerships, signing up distributors,
third party developers, and VAR's)"
RMBS is a pit bull, it is using its IP to extract its own terms of surrender
from the memory makers, and it is succeeding. They are falling like
dominoes. Their value chain runs deep and RMBS management is not
afraid to defend vigorously its patents.
From the last 10K:
At September 30, 1999, Rambus had a total of 31 licensees for the
newest generation of Rambus technology. Rambus licensees include
fourteen DRAM manufacturers which collectively accounted for over
95% of worldwide DRAM sales in calendar 1998: Fujitsu, Hitachi,
Hyundai Electronics, IBM, Micron Technology, Matsushita,
Mitsubishi, NEC, Oki Electric Industry, Samsung Electronics,
Siemens, Toshiba, Vanguard and Winbond. At September 30, 1999,
five of these licensees were shipping RDRAMs. Rambus logic
licensees include Advanced Micro Devices, Compaq,
Hewlett-Packard, IBM, Intel,
LSI Logic, Matsushita, NEC, S3, Texas Instruments and Toshiba.
RMBS is quickly becoming a Gorilla, just ask Intel, once a solid sponsor
of RMBS technology it is now trying to distance itself from its former
partner. See this excerpt from Tom Jacobs' dueling Fools:
Semiconductor Rule Maker Intel (Nasdaq: INTC) has decreed that
the market will accept Rambus. Intel signed a 1996 agreement with
Rambus that commits the giant to use RDRAM in controller chips
and to meet certain production and sales targets. The deal includes
such carrots for Intel as 4% ownership of Rambus and a seat on the
board. Since going public in 1997, Rambus watched its stock trade
sideways -- especially during last year's delay of the first Intel
product using RDRAM. When this glitch was resolved and Intel's
support for Rambus reconfirmed, memory makers made RDRAM
available, and Sony's (NYSE: SNE) PlayStation2 -- with Rambus
inside -- sold gazillions in Japan earlier this year. (Watch for its U.S.
invasion this fall.) When this happened, some FUD evaporated,
shorts covered, and the stock zoomed from a split-adjusted $18.44 to
$111.27 -- multiplying just under six times -- in 28 trading days!
Takes your breath away, doesn't it?
Also see this article, Rambus, Intel, on the outs?
fool.com
TinkerShaw puts it into perspective here:
boards.fool.com
and also here analyzing the merits of the lawsuits against RMBS and how
IP companies defend themselves:
boards.fool.com
and ptnewell adds a message about the hypergrowth RMBS is
experiencing:
boards.fool.com
"E. Company products and brand name are well recognized and
respected by its customers, peers, competitors and partners in the
relevant industry."
RMBS RDRAM means more speed and bandwidth in PCs and other
devices, their brand will in time be as well recognized as Intel's if they
become the industry standard. RMBS is not liked at all in the RAM
industry, fear and loathed is more like it, but then again MSFT has always
been loathed and look where it got them (an antitrust trial!). RMBS is
palying hardball with the memory makers, but then Gorillas are feared not
really loved, and because of their privileged position in the value chain the
status quo does its best to keep them in that position once they have been
anointed Gorillas, in the meantime their competitors and customers fight
like heck to usurp the Gorilla to be.
See this excellent post by HowlOnMoon that explains the facts of life for
RMBS:
boards.fool.com
and ptnewell gives an excellent overview of the prospects of RMBS even
if RDRAM is not adopted as a standard:
boards.fool.com
"F. Valuation metrics: "
(as of 11/22/00)
biz.yahoo.com
MktCap: $4.86 B
P/E: 87.7 (based on FY01 $0.57 est.)
P/S: 72.12
I should also mention that RMBS has no debt, $122 Million in cash,
equivalents and marketable securities, and a gross margin of 90% this
last quarter!
Risk:
There is a lot of risk with RMBS, first and foremost its patents can be
struck down in court. Without its patent protection RMBS is basically
worthless. Intel may really decide to support another RAM standard,
although so far none have materialized that can compete in terms of speed
with RDRAM.
See this post on Bandwidth Utilization by rbnelson:
boards.fool.com
and this post on the Pentium 4 situation at Comdex by DougK99:
boards.fool.com
The main risk with RMBS is one of litigation. Once that is resolved and
RMBS' patents are upheld the risks will go way down. We'll see how
things go in the courts, but by the way memory makers have been caving
in to Rambus I remain optimistic.
jasonxsmith describes the risks pretty well in this excellent post:
boards.fool.com
Risk
There is a risk that Rambus could lose all its patents when it goes to
court. This would make the company worth virtually nothing, but it
would also call into question every patent issued in the last 17 years.
If the patents are not invalidated, there seems to be virtually no risk
that the memory makers will find a way around the patents. Their
best attempt was DDR, and its design isn't really all that good to
start with.
Intel is still stating publicly that RDRAM is the way of the future and
the major memory 5 years out. There is a risk that this could change.
If RDRAM suddenly becomes very difficult and expensive to make
and no one can find a workaround, DDR may find a second wind. If
we get 3% of DDR sales, who cares, right? But DDR is a stop-gap
measure, and if RDRAM does not work as a mainstream solution,
another will have to be found - and quickly. So far, I have seen
absolutely no evidence that RDRAM will not be ready, and cheap, by
the time it is needed for value systems. I am getting very worried
about DDR however. :-)
SUMMARY:
RMBS is a young company, leading in licensing some critical technology.
RDRAM has speed on its side and acceptance by Gorilla Intel
(begrudgingly) for its Pentium 4 architecture, and also in Playstation2
consoles by Sony. I believe RMBS is emerging as a Gorilla and a force to
be reckoned with. As far as I'm concerned, it is a Rule Breaking stock
and deserves to be included in KARB.
-xerohype
(Disclaimer: I own shares of RMBS and may buy some more if the share
price continues to drift down.) |
