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This Company Can Relax and Collect Checks

By: David Sterman
Posted: 6/29/2010 1:18:00 PM
Referenced Stocks: GE;IP;RMBS

With a mountain of technology patents under its belt, technology firm Rambus (Nasdaq: RMBS ) has a long history of successfully suing any firm that appears to use its intellectual property ( IP ) without permission. Just last month, we discussed 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: GE (NYSE: GE ) 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 again).

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 valuable partner.

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, enterprise value (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 large one-time dividend , as they only need about $200 million per year to run the business.

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
Staff Writer

Disclosure: Neither StreetAuthority, LLC nor the David Sterman hold positions in any securities mentioned in this report.