Rambus (NASDAQ:RMBS) is a San Jose, California-based hardware technology company that focuses on the design, development, and licensing of chip interface technologies and architectures in digital electronics. Inventor of RDRAM, Rambus mainly focuses its portfolio on random access memory – RAM, Interface and Security intellectual property and other R&D and IP.
Additionally, to avoid confusion, Rambus refers to its 3Q23 earnings in its 4Q23 presentation.
Through these activities, Rambus achieved 3Q23 revenue of $105.30 million – a decrease of 6.19% – alongside net income of $103.20 million and free cash flow of 43, 62 million dollars.
As mentioned above, Rambus’ core offering continues to be its memory products, which it sells directly on a B2B basis, typically to data centers and edge computing applications, automotive companies, government and for IoT projects. Additionally, Rambus engages in the highest margin IP licensing activity throughout its interface and security products, as well as basic R&D patenting.
While all three of Rambus’ core segments are pursuing broad-based growth, driven by technology growth megatrends, the company has seen the greatest growth in chip and silicon IP licensing, with Rambus introducing central interfaces to drive data center demand. data, such as -State-of-the-art video compression IP, broad portfolio of designs that leverage megatrends across core technology and architectures to showcase interconnected solutions within data centers.
As such, while I believe Rambus trades above its fair value on a purely financial basis, I believe the company’s operational strength and extremely strong intellectual property and R&D gap will enable rapid growth and justify the asking price. its higher.
Therefore, I rate the Rambus a ‘buy’.
Valuation and Finance
Next year price action
In the TTM period, Rambus stock has 74.86% outperformed the technology industry, as represented by the Technology Solutions Sector SPDR Fund (XLK)- up to 39.01% and the broader market, represented by the S&P500 (SPY) – 13.85% increase.
A key factor behind Rambus’ overvaluation appears to be its large growth in today’s volatile macro environment, which has fueled skepticism about the company’s ability to continue similar growth.
However, given the downside threat of inflation, the possible easing of monetary policy in a shorter time frame given lower core inflation and continued aggressive investments in IoT and cloud infrastructure, in my view, enables growth in stable for Rambus.
Since Rambus operates in such a specialized portfolio of companies, many of its competitors tend to be either much larger companies or cater directly to retail consumers. As such, I tried to compare Rambus to similarly sized tech hardware companies, as seen in the ‘Peers’ tab of the Rambus Searching Alpha site. This group includes organic light-emitting diode manufacturer Ewing, New Jersey-based Universal Display (OLED), Hillsboro, Oregon-based designer and manufacturer of low-power field-programmable gate arrays, Lattice Semiconductors (LSCC), Manchester, New Hampshire-based semiconductor developer, and application-specific algorithm developer Allegro MicroSystems (ALGM), and Greensboro, North Carolina-based communications technology equipment developer Qorvo (QRVO).
As demonstrated above, Rambus has experienced best-in-class quarterly and annual price action, which has created gaps between it and its peers in terms of multiple-based value. Regardless, I believe Rambus’ historical growth and current capabilities can enable continued growth.
For example, although Rambus doesn’t pay a dividend because of its growth focus, investors holding the company over the past five years would have seen 688.15% growth, second best of its peer group.
This growth has been driven by the unparalleled growth in profits that Rambus has seen, with an aggressive increase in demand for its products, enabling a trailing 5-year revenue growth of 233.33%, well above the second best in the group , Universal Display, with 81.07% increase in profits.
However, Rambus looks overvalued at valuation multiples, with above-average P/E, P/CF and P/B multiples.
However, with the lowest debt/equity of the group, Rambus is well positioned to continue reinvesting and enabling its historic growth trajectory.
According to my discounted cash flow model, in its base case, Rambus’ net present value is $64.69, which means that at the current price of $65.51, the company is overvalued by 1%.
My model, calculated for 5 years without continuous growth, assumes a discount rate of 10%, reflecting Rambus’s high equity risk premium. Furthermore, remaining conservative, I forecast a future annual revenue growth rate of 6%, lower than the trailing 5-year average of 7.49%.
On the other hand, Alpha Spread’s multiple-based valuation tool believes Rambus has a 23% fundamental undervaluation, placing a relative value of $84.53.
However, Alpha Spread’s valuation of Rambus is biased by the external companies to which it compares Rambus and therefore, although informative, cannot be relied upon for valuation.
Rambus is capitalizing on megatrends and maintaining a moat of superior product offerings
The main megatrend driving Rambus’ growth orientation is the wide range of opportunities in the data center and peripheral markets. More specifically, data centers and cloud enterprises are increasingly targeting higher speeds and power that can be delivered through Rambus’ proprietary DDR5 platforms. In addition, Rambus leads the market in CXL – Compute Express Link, which seeks to promote a unified memory infrastructure to achieve higher speeds between host processors and accelerators – and enables rapid revenue growth and margin expansion.
As such, Rambus remains in a strong product positioning to support current growth objectives. Using the cash flow from this growth, Rambus intends to continue to invest and lead the industry in next-generation memory architectures, providing high-quality, secure and reliable memory systems, while increasing the focus on process safety new AI and quantum cryptography, all while maintaining the company’s existing strategic customer and product roadmap.
Risks & Challenges
The increasing intensity of competition and the threat of disruption is constant
Although Rambus maintains a strong product-oriented moat, with an unmatched pipeline of new and emerging products, the company operates in a fast-paced environment with constant innovation. As such, as the number of entrants into the cloud computing industry continues to increase, Rambus’ ability to maintain its growth capabilities is reduced and may lead to either price competition or accelerated R&D spending, either of which their may compress margins and/or growth.
Resurgent inflation may weigh on underlying demand
As seen with the latest CPI report, inflation appears to be slowing, implying that interest rates are likely to remain flat rather than rising. Thus, any reduced demand that Rambus has seen in lieu of higher rates and spending cuts by client companies is unlikely to continue. However, if inflation returns and/or rates rise subsequently, Rambus could see reduced demand from businesses.
The Wall Street Consensus
Analysts are generally more bullish on Rambus’s prospects relative to my rating, estimating an average 1Y price forecast of $70.50, an increase of 7.83%.
Even at the minimum projected price target, analysts expect only a 0.58% downside to a price of $65.00, representing Wall Street’s view – echoing mine – that investors are underestimating the macro growth and operational growth for Rambus.
In the long term, Rambus continues to leverage its innovative portfolio to capitalize on technology megatrends and deliver solid shareholder value for years to come.