|
Published: June 29, 2010
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
StreetAuthority |
