As Rambus Rallies, Nasdaq Watchers Relive the Days Before Gravity - TheStreet

The

Rambus

(RMBS) - Get Report

row is back on.

Shares in the chip-technology company jumped Friday morning on news of a patent-license agreement with

Hitachi

(HIT)

. After rising a face-melting 40% to 136 in after-hours trading Thursday night, Rambus finished Friday's session at 114 11/16, up 19% from the previous day's New York close.

The market now finds itself asking the same question it did early this year, as Rambus climbed to dizzying heights amid the

Nasdaq

froth. Can a money-losing company with quarterly revenue of $15.7 million be fairly valued at $11 billion, regardless of how good its technology looks?

The Debate

While some investors are clearly backing the idea that computer manufacturers will widely adopt Rambus' technology for turbocharging memory chips, others contend Rambus is simply another momentum favorite, along the lines of

Qualcomm

(QCOM) - Get Report

, which jumped 2,600% in 1999 after years of flat-lining.

Rambus supporters note the Hitachi agreement, along with news last week that

Toshiba

(TOSBF)

would expand its licensing of Rambus technology. Those deals suggest Rambus' patent position will give it a stream of lush licensing fees for years to come, bulls say.

"It's extremely bullish," says Mark Edelstone, semiconductor analyst at

Morgan Stanley Dean Witter

, which took Rambus public three years ago. "It's the biggest news the company could have possibly received. When you combine the Toshiba deal with the Hitachi settlement, it goes a long way toward validating the defensibility of Rambus' patent."

Where It Gets Muddled

No one on Wall Street is doubting that licensing offers Rambus significant opportunities. But there's no clear consensus among the analyst community what those opportunities are worth. Witness the diverging reports issued Friday by Greg Mischou of

UBS Warburg

and Drew Peck of

SG Cowen

. To Mischou, the Toshiba and Hitachi deals will be followed by similar agreements with other DRAM vendors. The potential resulting growth in Rambus' royalty stream was enough to make Mischou raise his price target on the stock to 165 from 115.

Peck offers a much more cautious outlook, noting, "The current dizzying valuation appears to discount much of the upside. Even if all DRAM makers agree to pay royalties to Rambus on all memory flavors, the stock is no bargain.

The upside will depend on a long period of sustainable increases in DRAM pricing -- a very tough call." Peck reiterated his neutral rating. Neither Peck's nor Mischou's firm has been a Rambus underwriter.

Valuation questions have been puzzling investors for a few months now. After spending most of last year in the neighborhood of 20, Rambus jumped as high as 117 3/4 in March, then sank into the high 30s with the spring thaw. (Those numbers are adjusted for a 4-for-1 split earlier this month.)

Mo' Better Blues

Even if you concede the technology's strength and the according licensing possibilities, the stock just now may be too expensive.

"The stock was just at 55. Do I want it at 122?" asks Barry Hyman, chief market strategist at

Ehrenkrantz King Nussbaum

. "Ever since Qualcomm's demise, Rambus has been the poster stock for momentum investors," he says. (Qualcomm is now some 65% off its early January high.)

"No discrediting the technology and the licensing possibilities, but my game is not to chase," says Hyman, who prefers to look for value plays among tech heavyweights.

"I don't ignore the possibility that the stock goes to 200 or even higher," Hyman says. "Anything's possible."