When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Rambus today, and see why you might want to buy, sell, or hold the specialist in developing and licensing patented technologies for digital electronic products.
The simple description of Rambus offers one reason to consider buying it: It holds valuable patents on digital technologies. Patents are a wonderful kind of business, because once you own them, you can rake in money by licensing them to others. That's a business that scales well, too, since it doesn't cost Rambus much to license various patents to additional customers. Over the past five years, Rambus' revenue growth has been lumpy, but it has grown at an annualized average of nearly 12%.
Rambus isn't resting on its existing patent laurels, though. It's busy developing new technologies, too, in part by buying other companies. It expanded into the field of cryptography licensing, for example, by buying Cryptography Research for $343 million. Just last month it bought Unity Semiconductor, a specialist in solid-state memory technology. And it's collaborating on LED lighting with none other than General Electric
A downside to Rambus' patent business is that, per some observers, it's spending too much effort in litigation, suing others for alleged infringements. Sometimes lawsuits make a lot of sense, but if suing becomes a business model itself, it can detract from a company's other operations, taking attention away from the development of new technologies, for example. It can also surround a company in a cloud of uncertainty.
For example, in the past year Rambus filed suits against chip makers such as Broadcom
That 60% drop illustrates another downside to the company: It's volatile. That can be OK, if you're focused on long-term performance. But if sharp spikes and drops stress you out, consider bypassing Rambus. Just last month, a lawsuit with NVIDIA was settled, and shares jumped 11% as the announcement also included news of a five-year licensing agreement.
Another downside for Rambus is that in the past few years, it hasn't posted much in the way of net income. Its profit picture has been generally improving, with relatively deep losses in 2008 and 2009 followed by a big gain in 2010 and a more modest loss in 2011. But reliable profitability would be far better.
Then there's Elpida Memory, a major customer (to the tune of about 10%), which recently filed for bankruptcy protection. That doesn't bode well for Rambus in the near term.
If you're not sure what you think about Rambus, perhaps just hold off on taking any action. You might wait to for more litigation dust to settle, for example. Or perhaps wait for it to report more patent licensing renewals. (Conveniently, Rambus reports on many such renewals at its website.)
I'm holding off on this company, myself, as there's a little too much uncertainty for me. There are, after all, plenty of other compelling companies out there.
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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter here, holds no position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of NVIDIA. Motley Fool newsletter services have recommended writing puts on NVIDIA. 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.