With a mountain of technology patents under its belt, technology
has a long history of successfully suing any firm that appears to
use its intellectual property (
) without permission. Just last month,
the company's latest legal challenges to secure royalties.
On Monday evening, Rambus showed that it can also play nice, using
its considerable IP to help develop a market, rather than pounce
once a market is developed. Although Rambus is most known for its
IP in the area of semiconductors and telecom, it also has an
impressive array of LED lighting patents that it acquired in a
recent acquisition and then augmented with its own IP.
The new LED division, which uses back-light technology to provide
sharper illumination, has already found its first major customer:
and Rambus announced on Monday evening that they are teaming up to
develop a range of newly-developed architectural lighting products.
This looks like a win/win for Rambus, as it will require no capital
outlays and simply share in the profits. (Investors initially
pushed shares sharply higher in after-hours trading on Monday. But
the Tuesday market rout has led shares to be flat in today's
trading. When the market stabilizes, shares should start to rise
The deal is a bit unusual for Rambus, which prefers to make sure a
whole industry has use of its IP. In this case, GE appears to have
exclusive use of Rambus' lighting IP. Then again, GE is one of the
biggest lighting firms in the world, so it surely counts as a
As is the case with all of Rambus' other businesses, there's no way
to peg any sort of value being created by the firm for this deal.
Rambus did not appear to secure any upfront money for the
technology license. Investors can only conclude that it will add
another channel to the company's royalty income streams.
So how do you place a value on a company that has erratic, but
bounteous earnings streams? A
price-to-earnings ratio (P/E)
doesn't apply. Rambus lost nearly $1 a share last year, will likely
make more than a $1 a share this year, and it's anybody's guess
what will happen next year on the earnings front.
In this instance,
(market capitalization plus debt minus cash) is a better gauge. The
company has about $555 million in net cash, implying an enterprise
value of around $1.6 billion. The value of its existing patents is
likely worth at least $1 billion, but probably worth well more as
the base of IP could snag up to $2 billion in settlements over the
next three to five years.
This is all very imprecise, which explains why most Wall Street
firms simply avoid trying to even value and follow the stock. But
with each passing year, it's apparent that Rambus' team of 290
engineers (out of 350 employees) are on the right track, developing
patents that turn into major money makers. Over the next 12 months,
investors should see further large checks being mailed to Rambus.
Management may in turn look to do a large share buyback or issue a
, as they only need about $200 million per year to run the
Action to Take -->
We'll reiterate our comments from a month ago, as they still stand:
"Over the near-term, shares should rebound and push past the $30
mark, perhaps closer to $35. That's because the company is expected
to imminently win a patent case... which could net the company
close to $500 million in an upfront license, and then more revenue
from ongoing royalties." We added that a similar windfall may be
coming form an unrelated patent dispute. The GE deal simply
strengthens the bullish outlook.
-- David Sterman
Disclosure: Neither StreetAuthority, LLC nor the David Sterman
hold positions in any securities mentioned in this report.
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