What a difference a day makes. Yesterday, Rambus' (Nasdaq: RMBS ) stock fell 16% after the company announced a 19% increase in quarterly revenue but a 24% decrease in net income. Today, the stock is up 16% on news that Rambus has received a favorable summary judgment ruling in its patent infringement case against Hynix Semiconductor.
To put both stories in perspective, consider that the $2.1 million decrease in the most recent quarter's net income (when compared with the year-ago quarter) had a center-stage culprit -- a $5.2 million increase in litigation expenses. Those trips to court delivered the stock-killing earnings release yesterday.
Rambus has made a lot of court appearances since filing separate suits in August 2000 charging patent infringement against Hyundai Electronics (now Hynix), Infineon Technologies (NYSE: IFX ) , and Micron Technology (NYSE: MU ) . Today, a judge issued a summary judgment ruling that Hynix did infringe 29 claims on four patents.
Today's court "win" does not mean a new flood of licensing revenue. There could still be appeals, and all these suits are still in court.
Investors salivate at every whiff of good legal news because if Rambus wins, for example, the Infineon suit, it is estimated that $40 million in high-margin royalty income would be produced annually. Add that to a reduction in legal expenses (and an award for past legal expenses, too), and the financial impact on Rambus would be significant.
Consider this: Rambus had $23 million in litigation expenses in 2004. That is 22% of all expenses, and a lot for a company with just $33.6 million in net income.
The burdens of litigation have hammered Rambus' stock. It's down 46% from where it was a year ago, although the company's net income has increased 45% over that period.
Working in its favor, in addition to the potential litigation scores, is that the company is debt-free and cash-rich. But in my book, even the combination of the past year's decline and a strong balance sheet isn't quite enough to justify the stock's trading for 13 times sales and 66 times trailing earnings. That's pricey.
I'd say there's a decent chance today's sharp gains will be given back. There are still court cases to settle and litigation costs to hold down earnings. What today's court ruling does is give some whiff of hope to long-term investors who are looking for sharply increased royalties and decreased litigation costs, along with continuing innovations, to ignite Rambus' earnings and stock price.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.