We're always looking for Rule Breakers. It's in our blood! You too? That's one good reason to join David Gardner and friends for our Quest for Rule Breakers 2001 online seminar, so you can mix it up with fellow Fools and find inspiring Rule Breakers. (Registration ends January 10, so don't tarry!)
One potential Rule Breaker that inspires loud debates is memory chip technology designer Rambus (Nasdaq: RMBS), of which I'm a shareholder. RB Portfolio manager Brian Lund is on record saying that Rambus satisfies every Rule Breaker criterion except one. I'd like everyone to reread that sentence: That's more than any other company analyzed for Breakdown August, which resulted in the Rule Breaker Portfolio's purchase of Human Genome Sciences (Nasdaq: HGSI).
OK, to be fair, there's one itty-bitty catch with that sweeping Rambus endorsement: The one criterion Brian thinks Rambus lacks is sustainable advantage -- perhaps the most important one. The Rule Breaker defines sustainable advantage as "gained through business momentum, patents, visionary leadership, and/or inept competition." Yup, mighty important, I'd say, for a risky investment hoping to pay off big.
Yet, I will show beyond a shadow of a doubt (he said, as Rambus' advocate) that Rambus has more sustainable advantage than the Fool has jester caps. Today, business momentum and inept competition. Tomorrow, patents and visionary leadership.
Rambus developed and is advancing patented technology fundamental to the juiced-up, speed-hungry computer world just now born. It doesn't manufacture the products that use its technology -- it licenses the technology to others and collects royalties. This is why investors label it an intellectual property (IP) company.
Think of a computer as having separate heads that need to talk to each other. The first head runs the show. It controls the computer's operating system and performs the calculations. Call it the microprocessor or the CPU (central processing unit). The CPU must get instructions and data from the second head, the memory, called DRAM (dynamic random access memory). Since 1980, the CPU head has evolved from 5 MHz (million cycles per second) to more than 700 MHz and beyond, much faster than the DRAM head, which has advanced to only 100 MHz, creating a major bottleneck. Standard DRAM just wasn't up to -- gulp -- speed.
One breakthrough in DRAM, called SDRAM (synchronous DRAM), has reached 133 MHz, and most of us have computers these days with SDRAM. Founders of Rambus caught on to this evolutionary discrepancy and developed technology to address it. That technology, RDRAM (for Rambus DRAM), speeds things up so that the CPU can make "multiple concurrent requests" to the memory, increasing efficiency. Increased bandwidth (data transfer rate) reduced the bottleneck.
RDRAM is available now. Intel's (Nasdaq: INTC) newest chip, the Pentium 4, uses only Rambus' RDRAM and clocks in at a sizzling 1.5 GHz. (It makes me want to say, "And they don't take American Express!") If you want to see, here's a $1,699 Dell with the Pentium 4 and RDRAM.
Isn't the PC dead?
You say: "This guy dragged me all the way here to look at a Rule Breaker that's jazzing up PCs? That's so 1997!" Never fear. You and I don't care a Fig Newton about speed and bandwidth for word processing or limited Web surfing. Better PC technology just doesn't sound very Rule Breaking, does it?
But RDRAM is about memory bandwidth to support the multimedia and hyper-speed communications. Fool community member Chad (jayseae) tells us, observing that RDRAM may even slow down performance a bit in current systems, "RDRAM probably isn't necessary for your average desktop systems. It really begins to shine as you get into more power. And, more power means servers" and other far-more-complex, demanding systems.
So, all the media blather about whether and when Intel would actually introduce its first Rambus-ized chip was just a sideshow. The bigger picture is represented by the list Chad provides of Rambus' licensing deals with companies who will build Rambus technology into non-PC products:
Company Application Sony (NYSE: SNE) PlayStation 2 Agilent Tech. (NYSE: A) Testers H-P(NYSE: HWP) Network communication ASICs IBM (NYSE: IBM) Network communication ASICs LSI Logic (NYSE: LSI) Network communication ASICs NEC (Nasdaq: NIPNY) Network communication ASICs Texas Instr.(NYSE: TXN) Network communication ASICs Toshiba Network communication ASICs Toshiba Video games SwitchCore Ethernet switches Vitesse (Nasdaq: VTSS) Optical networking comm. Schlumberger(NYSE: SLB) High-speed testers Panasonic HDTVs/set-top boxes EMC (NYSE: EMC) Network-attached storage
How's that for business momentum? RDRAM is the memory for the Intel Pentium 4 and the PlayStation 2, but look beyond for best-in-class companies providing new and existing applications. I mean, when EMC came along, I just kinda went, "So, Rambus in my coffee next?" Why not increase the caffeine data transfer rate?
What about old-time SDRAM's and RDRAM's supposed up-and-coming competitor, DDR SDRAM (which, to be fair, is apparently Microsoft's (Nasdaq: MSFT) choice for its Xbox video game system)? Fool community member Eric (erkaye) provides this view:
"DDR [SDRAM] and SDRAM are dead-end technologies. They have reached their theoretical speed limit (although it is also true that no one has even able to produce a shippable version of DDR for PCs, it is eventually going to be a reality...). Rambus continues to innovate to speed up its interface using more channels and potentially larger byte sizes, and the [next-generation Rambus] Quad technology, which will again double the theoretical speed of the system. In this way [Rambus'] advantage continues to increase, rather than lessen."
Before it even arrives, DDR is dead for the kind of world Rambus envisions for RDRAM and its progeny. There is a clear road for Rambus to dominate the future of DRAM -- an estimated $60 billion to $100 billion market -- in three to five years. At a 3% royalty rate, there's true potential for Rule Breaker returns.
See you tomorrow for more on how a company that doesn't "make anything" has a gonzo sustainable advantage!