Here's Why Rambus Is Earning So Much for You

Margins matter. The more Rambus (Nasdaq: RMBS  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Rambus's competitive position could be.

Here's the current margin snapshot for Rambus and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Rambus

97.9%

32.2%

46.7%

 ARM Holdings (Nasdaq: ARMH  )

93.6%

26.3%

21.1%

 Micron Technology (Nasdaq: MU  )

31.1%

20%

20%

 NVIDIA (Nasdaq: NVDA  )

39.8%

5.6%

7.1%

 

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Rambus has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Rambus over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 97.9% and averaged 89.2%. Operating margin peaked at 32.2% and averaged (1%). Net margin peaked at 46.7% and averaged (40.1%).
  • TTM gross margin is 97.9%, 870 basis points better than the five-year average. TTM operating margin is 32.2%, 3,320 basis points better than the five-year average. TTM net margin is 46.7%, 8,680 basis points better than the five-year average.

With TTM margins all at a 5-year high, Rambus looks like it's doing great.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Rambus? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. NVIDIA is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 06, 2011, at 6:16 AM, nov10pc wrote:

    Rambus gets its revenue mostly from license fees for patents. It had to go to court to get these fees since the patents are contested.I have not taken a closer look at the actual number (but apparently the author of the article did neither), but it ist most likely that the margins improved because of lower legal costs or lower spending on r&d and is not a sign of improved competitiveness!

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