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Rambus: In Trouble?

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By dyoung22
July 18, 2001

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Paul,

- The DRAM market is horrible right now as you know. Rambus can't do anything about plunging SDRAM and RDRAM prices. As a result, with the royalty lag, they are anticipating sluggish revenue going forward given what is known today.

- I still calculate a hefty 32% ROIC using the last nine months data and projecting another quarter forward, which I projected to be ugly. Not too bad considering the losses being piled up in the industry.

- Receivables did jump quite a bit, but I suspect this is Rambus throwing a bone to a big dog that has a lot of bite, namely Samsung.

- Speaking of Samsung, yes they will pay a flat royalty rate ON SDRAM ONLY for the next 4 quarters, probably the amount of time it will take to completely shake out the industry. If SDRAM prices stay near the equator for another two quarters, this may not amount to an even noticeable amount of lost revenue. Rambus knows who it needs to remain friends with, so it is strategically giving Samsung a break as it, too, piles up steep losses on SDRAM, but from SDRAM only. Rambus still benefits from Samsung's ramp in RDRAM, so I view this as a non-event short term and a strong move long term. This way Samsung can continue to float SDRAM chips onto the open market and punish Micron and Infineon even more. Samsung keeps the prices low and pressure on Micron, and Rambus rewards them for doing such. Looks like a good gorilla-gaming move to me.

- I suspect that next week we will see that things are about to change. As Intel reveals its new road map, it will be bye-bye to the PIII. By this time next year don't be surprised if 75% of Intel-based desktops feature P4 and 10-20% of laptops as well. Intel is tightening the screws on AMD during this downturn simply because it can, and the year lead in the move to a 0.13 micron process is a great example of this. Will a corporate buyer go with a 2.2 GHz 256MB RDRAM P4 that is stable (and cheaper if Intel wants it that way) or a 1.2 GHz AMD Duron? I know about the planned release of a SDRAM/DDR version of P4, but I think the current pricing environment mitigates this "risk" if you will.

- We are reaching an inflection point. During the Jan-Mar quarter (which created this quarter's royalties) the market shipped over $500 million in RDRAM. Unit volume jumped 80% in the April-June quarter, and Rambus says the unit volume superceded the price movement downward so that dollar volume increased as well. It's getting to the point that, with SDRAM prices in the toilet, the majority of RMBS royalties are RDRAM related. If Intel reveals what I believe it will next week, then this trend should only improve. As Intel tells the industry, "It's all P4 ladies and gentlemen," it can simultaneously say "Checkmate" to Micron and AMD while slapping five yet again with Samsung.

- This is a $30 stock right now given the brutal DRAM market with a settlement or court victory. When the market realizes the dramatic move to RDRAM it's a $100 stock. It's certainly frustrating, but I can't find another firm that can POTENTIALLY generate a higher ROIC and greater relative amount of free cash flow. Hey, it's a great chance to keep buying. I'm not going anywhere for a while. I wouldn't wait for the Street to jump on the bandwagon either. Rambus doesn't represent any potential investment banking business, so they'll keep slapping "Immediate BUY" recommendations on Infineon while competing for Micron's $450 convertible offering.

Dave