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The Futile Exercise of Trying to Put a Rational Value on Rambus

Also, more graveyard gossip.

Tuesday Thud:

Just for fun:



(RMBS) - Get Rambus Inc. Report

closed in on the 12-month targets of some analysts when it topped 100. No big deal in a market where many, if not most, Internet valuations are considered way out of whack. Or in a market that has helped inflate

Micron Technology

(MU) - Get Micron Technology, Inc. (MU) Report

, despite every suggestion that the darling of DRAM's valuation at almost any point in recent years was more than out of whack. (Yep, the same Micron that has made yours truly look like a fool more times than I care to remember.)

So where does Rambus stand in the world of the out-of-whacked? One argument, posed by a longtime anti-Rambus rabble-rouser, goes like this: If Rambus gets 100% of the memory chip market over in the next year or two, and gets a royalty of 2% on each chip sold -- the high end of expectations -- you'd be looking at 2% (again, on the high end) of an estimated $10 billion market. That would be $200 million, or roughly one-tenth its current valuation.

Even if you applied


(INTC) - Get Intel Corporation (INTC) Report

current multiple of seven-times-sales you'd still come up short, and that's


deducting expenses (albeit low) and taxes (like any other company). "You can't justify that unless you think the whole DRAM market will explode, like some kind of nuclear strike in Korea," our skeptic says. "How is 1% or 2% worth 2 to 3 billion dollars" in market valuation?

Simple: market sentiment and momentum. Just as they drove Micron to unrealistic and unsustainable levels, so will they drive Rambus. "It's not like people are making rational judgements of Internet stocks, either," says

SG Cowen's

outspoken Drew Peck, who is just as likely to be negative on a company as he is positive. (In this case, he has a buy rating on the company; Cowen did not underwrite Rambus' 1997 public offering.)

In a nutshell, Peck sees it like this: The DRAM market is currently at the low point of its pricing cycle, and annualized, the DRAM market is twice the size of the number used by our skeptic (who based


estimate on Micron's sales). Peck also is looking for a DRAM shortage starting late next year, and he believes Rambus will be in the right place at the right time with the right (256-meg) chip. He also says critics don't take into account the fact that Rambus' logic chips that are bought by video game makers, which he figures add another 50% onto the projected sales figures.

He also believes Rambus could earn as much as $7 to $8 per share in 2001 or 2002, compared with 28 cents last year. He says his analysis assumes that Intel provides "unwavering" support for Rambus. Intel's chips, using Rambus technology, are expected to ship in September. (See my colleague Marcy Burstiner's excellent

coverage of Rambus for more detail.) If Intel backs away, he adds, "all bets are off."

TheStreet Recommends

In the meantime, our Rambus rabble-rouser argues, so is rational analysis.

Hate to sound like Cramer, but:

Pathetic is the best way to describe a

New Orleans Times-Picayune

story over the weekend regarding

Stewart Enterprises


, based in a New Orleans suburb.

Headlined, "Stewart Enterprises Believes Its Steady Pace of Expansion Will Lead to a Strong Future," the story paints a glowing picture of Stewart as the exception to the rule in an industry beset by problems. There are quotes from your typical bullish analysts saying how great Stewart is, how it doesn't need to be turned around because it isn't broken.

There was no mention in the story of balance sheet concerns or questions about the quality of Stewart's earnings. But whaddaya want? Reality is that the story is a classic example of hometown boosterism and the worst in parochial journalism. If it weren't for the fact that this story was written by a woman I'd say the good ole boys network was alive and well in Louisiana.

And, poorly timed, I might add: Monday

Banc of America Securities

analyst David Scharf sliced his earnings estimate on Stewart by a penny this year and a nickel next year. He cited one of the very reasons that was pooh-poohed by the


: concerns over the death-care industry's ability "to sustain its historical levels of funeral price increases." The stock fell 1 1/4 to 14 7/8.

And speaking of Stewart, an item here

last week said that

J.P. Morgan

analyst Joseph Chiarelli valued Stewart by not subtracting debt. Subtracting the debt, he was quoted as saying, would've resulted in higher multiples for various metrics (relative to his calculations), which in turn would have resulted in a higher valuation -- not lower.

To which he said on Monday: "You misquoted me regarding Stewart's valuation. What I said was that when I do a valuation computation without debt, I use a lower multiple to value the company than if debt is included. If debt is deducted in the computation, a higher multiple is used which usually results in a higher value."

On that note ... until we meet again.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.