Never Say 'Dai: Rambus Soars on Newfound Support - TheStreet

Never Say 'Dai: Rambus Soars on Newfound Support

Responding to a similar move from Intel last week, Hyundai is getting behind Rambus-based memory.
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SAN FRANCISCO --

Rambus'

(RMBS) - Get Report

stock has soared 125% in just eight days as tech companies are beginning to line up behind its computer memory designs. Add one more to the list.

Korean memory giant

Hyundai

, which until now has been highly critical of Rambus technology, is throwing its full backing behind Rambus.

"Our management has decided to put a lot of emphasis on Rambus," says Farhad Tabrizi, Hyundai's vice president of strategic marketing and product planning. "We will be one of the top three makers of Rambus memory this year, and we plan to be the No. 1 player next year."

Hyundai, a former Rambus critic, joins

Intel

(INTC) - Get Report

,

Samsung

and

Toshiba

as key Rambus supporters. Last week at its

Developer's Forum, Intel committed some of its future products to Rambus-based memory. Samsung and Toshiba already make Rambus-based memory in large volume.

It's this increasing support that's making a huge difference in Rambus' fortunes -- and its stock price. The Mountain View, Calif.-based company's stock hit an all-time high of 203 1/16 Wednesday, though it then slid back to 177, off 1 9/16 for the day.

Thanks to this growing circle of friends, analysts expect more gains.

"The market is telling you the environment has changed," says Mark Edelstone, a chip analyst at

Morgan Stanley Dean Witter

who's been one of the most vocal and consistent supporters of Rambus and whose firm underwrote the company's IPO.

A key element in this changing market was Intel. Intel's announcement last week that its upcoming

Williamette

chip for high-end desktop computers would support only Rambus-based memory incited a stampede of short-sellers, who at the time accounted for one out of every two Rambus shares available to trade.

Intel's decision also helped convince Hyundai. Just last October, Hyundai had big issues with Rambus, which

faced delays from Intel and a revolt by the memory makers, including Hyundai, opposed to the high cost of making Rambus DRAM, dynamic random access memory -- the memory used in all personal computers. Hyundai's Tabrizi said then that Intel's problems with Rambus technology left Hyundai holding costly parts it couldn't sell. So it wouldn't commit to making Rambus DRAM again, he said, until it was sure it would sell.

And now? "If Intel's strategy fails, it could have a big impact on the overall PC market," Tabrizi says. "So we have to respond to what Intel wants."

So the bulls now say Rambus has finally turned the corner, 10 years after the company was founded and three years after it debuted on the public market as one of 1997's hottest IPOs. Behind the enthusiasm was Rambus' operating structure: It's in the business of designing, not manufacturing, superfast memory chips, so it can keep expenses low and live on royalty income.

There are, of course, some concerns. Rambus is now more than 50% above its previous high of 117 1/2 in July 1999, even though estimates for the technology's penetration now show much slower growth was expected a year ago. Last July,

Cahner's In-Stat Group

predicted that Rambus-based DRAM would take about 55% of the market by 2001. Now, Cahner's figures Rambus won't hit that level until 2003. (Cahner's doesn't have consulting relationships with individual companies.)

Then there's the fact that the memory market, even more so than the larger semiconductor market, is savagely cyclical. When the DRAM market peaked in 1995, for example, $40 billion worth of memory was sold. But by 1998, it had collapsed to $14 billion. Cahner's Steve Cullen expects that the market will be healthy for the next few years as memory supply tightens. But by 2003 or 2004, the industry will have built more manufacturing capacity, leading to a market plunge, he says.

Critics also argue that Rambus parts cost as much as 50% more to make than standard synchronous DRAM and that consumers and corporate buyers won't spend more for it. "Intel would like to convince the end users to buy them," says one memory industry consultant who asked to remain anonymous. He says the cost difference won't drop below 20%, he says.

Hyundai's Tabrizi agrees that Rambus designs cost too much. But with a note of resignation in his voice, he says, "The premiums will go down, hopefully, when the volumes go up."

Edelstone dismisses the cost factor and insists instead that a 55% share of the memory market for Rambus could be conservative. The company

sued DRAM maker

Hitachi

in a Delaware court Jan. 18 for patent infringement. If Rambus wins -- and at this early point, the outcome is anyone's guess -- Rambus could get royalties on all synchronous DRAM. In that case, Rambus is looking at potentially $1.2 billion in royalties in 2003, or $960 million in income assuming an 80% margin. In 1999, Rambus had just $43 million in revenue.