Last year, a double-digit rise in shares of semiconductor designer Rambus (RMBS Quote - Cramer on RMBS - Stock Picks) was as common as a dot-com millionaire.
boundless tech optimism. Rambus rose to its lofty valuation at a time when cash was plentiful and rumors, innuendo and pure speculation were major market forces. Back then, investors dreamed freely of a day when Rambus would dominate the entire memory market with Rambus DRAM, or RDRAM. Chip giant Intel (INTC Quote - Cramer on INTC - Stock Picks) planned to include RDRAM with its new Pentium 4 microprocessor for personal computers, furthering those lofty daydreams. A year later, it's far less likely that RDRAM will take over the memory market. A consortium of DRAM makers are together behind another next-generation memory chip, called double data rate or DDR. Rambus has filed lawsuits against these chipmakers, contending that DDR and the current standard, synchronous DRAM or SDRAM, are covered by Rambus patents. At the same time, Intel's plan to use RDRAM still isn't ironclad. Intel will launch Pentium 4 compatible technology for SDRAM by the end of the year and possibly for DDR next year.Cheap?
So Rambus today trades at more earthly levels, right? Hardly. Its stock has a lofty price-to-earnings ratio, with the stock trading at about 92 times fiscal 2001 earnings. To put that in perspective, Qualcomm (QCOM Quote - Cramer on QCOM - Stock Picks) -- a telecommunications company with a similar licensing business -- trades at 46 times forward earnings, while a growth chip company like Applied Micro Circuits (AMCC Quote - Cramer on AMCC - Stock Picks) trades at 59 times fiscal 2001 earnings, both of which are still considered expensive by some. "I think the problem with Rambus was that it was being driven more by news stories than fundamentals," says Dan Niles, an analyst at Lehman Brothers who no longer covers the stock. "Back then it was very much chat rooms, or hearing a rumor on the Internet." (Lehman hasn't done recent underwriting for Rambus.) But even while some of the froth has gone out of Rambus, the bulls are still able to find fuel for a story of eventual RDRAM domination that they can use to justify its current high price. For one thing, Rambus could end up litigating its way into more market share. Those patent suits against Micron Technology (MU Quote - Cramer on MU - Stock Picks), Infineon and Hyundai Electronics could result in Rambus receiving royalties from all memory makers on SDRAM and DDR in addition to RDRAM. Rambus has already signed up SDRAM and DDR makers accounting for 40% of the market by volume.If
"If Rambus wins these court cases, a year from now they will win a royalty on every DRAM, which would result in an earnings number which means the stock is very cheap today," says one New York money manager who's long the stock. "But who knows?"| Riding Rambus Down Like an Internet stock, Rambus' valuation was based more on hope than reality |
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