uncle,
This is from several weeks ago, but I don't recall this being posted so:
companysleuth.com
Dec 16, 1998
Silicon Valley: At Rambus, Sidling into the Slow Lane
By Marcy Burstiner
Staff Reporter
SAN FRANCISCO -- It has taken Rambus (Nasdaq:RMBS - news) nine years to sell the PC industry on its memory-enhancing chip designs. Now that the first-ever Rambus-based PC-memory devices are headed for Intel's (Nasdaq:INTC - news) chip sets, you'd think Rambus' ship is finally coming in.
Thanks in large part to Intel's backing, companies are flocking to Rambus' designs. Transcend Information, a leading memory maker for PCs and servers, said Tuesday it would make Rambus-based DRAM modules. But even as Rambus' stock rose 4% on the news Tuesday, fund managers and analysts were shaking their heads at the stock's lofty price. Rambus' much-hyped potential, they argue, may well be undone by two vulnerabilities: a heavy dependence on Intel and a reluctance among memory makers to pay the royalties Rambus is seeking for its designs.
"I'm a bit skeptical of the long-term prospects of the company," said Trent May, a portfolio manager with the $810 million Invesco Growth fund, which is long Intel. "I get nervous when a company is dependent on convincing existing DRAM companies to pay a royalty to make the stuff."
When Mountain View, Calif.-based Rambus went public in May 1997, it was one of the hottest IPOs of the year because its business model featured low operating costs. Rambus licenses its designs, lets its DRAM customers eat the manufacturing costs and then takes a royalty for every memory chip sold. That keeps margins high. With royalties just starting to be paid, Rambus' gross margin is 21%, compared with Micron's 9%. But royalties have been slow to pour in. PC makers were loathe to pay an average of 1.5% of the price of their chips for the memory-enhancing designs. In the year ended Sept. 30, most of Rambus' royalties came not from PCs but Nintendo game consoles.
Things changed earlier this year, when concerns about memory bogging down processing speeds prompted Intel to decree Rambus the new standard, even devoting a significant portion of its fall developer's conference to Rambus seminars. And it put dollars behind its decree, with a $500 million stake in DRAM maker Micron (NYSE:MU - news) , to jump-start Micron's company's slow efforts to adopt Rambus-based high speed memory.
Now memory makers are lining up with new Rambus-based DRAM, and 1999 "should be the real payoff for us to be potentially in every computer over the next few years," Rambus CFO Gary Harmon said. "We have 14 DRAM companies licensing Rambus, and there are probably only 20 in the world."
Rambus products are hitting the assembly line just when the memory industry awakens from a three-year slump. Memory-chip sales will grow to $45.5 billion in four years from $13 billion this year, according to Cahners In-Stat Group. If Rambus can take a 60% share of that market, as In-Stat forecasts, the company could increase its annual royalty fees to $400 million in four years from just $9 million in 1998.
Rambus got a big boost in mid-November when companies like Toshiba demonstrated their first Rambus-based memory components at the Comdex technology trade show. The trouble is that the stock, trading at 332 times earnings, is valued as if it will maintain a monopoly status in memory enhancement. And that might not happen. Even as the memory makers like Micron, Hitachi, Toshiba and Samsung endorse Rambus, these same companies are working at bypassing its fees by simultaneously investing in two alternate high-speed memory interfaces: double-data-rate DRAM, or DDR-DRAM, and synchronous-link DRAM, or SL-DRAM.
"DRAM companies are resistant to paying license fees," says Nathan Brookwood, a technology analyst at Insight 64. "They would love to have an alternative and not have to pay Rambus."
Samsung Semiconductor says it would offer both Rambus and DDR-DRAM next year. And last week IBM (NYSE:IBM - news) and Silicon Graphics (NYSE:SGI - news) announced they would use only DDR chips for their servers and workstations. And this even though Rambus insists its chips are four times as fast as DDR-DRAM and twice as fast as SL-DRAM.
Others say Rambus' potential depends too much on Intel's continued support. "We have seen Intel blow up partners before," says Scott Nirenberski, who covers Micron for Credit Suisse First Boston. "At the end of the day, Intel wants good technology at decent prices."
Too much of Rambus' future potential is already built into its current stock price, Nirenberski said. At best, if the memory market grows to $45.5 billion in four years and Rambus takes a 100% share and earns average royalties of 1.5%, it will generate about $683 million in licensing fees. Figure in a 65% net margin, and the company would earn about $500 million in net profit. That means, he said, that Rambus' stock is trading at almost five times the company's best-case scenario four years out. (Credit Suisse First Boston is not an underwriter for Rambus or Micron.)
Invesco Growth's May said that for Rambus to become a big enough company over the long term to interest him, the company would have to develop new technology that takes it beyond the DRAM market's limitations, and there are no such current plans. "You are betting that they will take their intellectual property and expand out," May says. "There are too many unknowns. I'm not willing to make that bet."
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I love scepticism when it's proved wrong as I think these analysts will be.
Barry |
