Rambus Inc.: Charting New Waters Amid the AI Surge
Rambus Inc. (NASDAQ: RMBS) specializes in chip design and production, primarily licensing its innovative technology and architecture to semiconductor companies. Much like Arm Holdings Inc. (NASDAQ: ARM), Rambus earns royalties from its extensive portfolio of over 2,700 patents connected to its memory architecture.
In addition to its licensing operations, Rambus produces DDR4 and DDR5 memory interface modules and chipset solutions. DDR5, which offers double the capacity, enhanced efficiency, and reduced power consumption compared to DDR4, can significantly improve the battery life of mobile devices. However, it comes at a higher price point and is not yet as widely accessible.
The rising demand for artificial intelligence (AI) requires high bandwidth and fast memory speeds, making DDR5 RAM especially valuable. As DDR5 is set to become the industry standard, an extended upgrade cycle appears likely. This situation bodes well for Rambus, which provides comprehensive DDR5 memory interface chipsets.
Some of the prominent clients in Rambus’s technology sector include NVIDIA Co. (NASDAQ: NVDA), Advanced Micro Devices Inc. (NASDAQ: AMD), and Micron Technology Inc. (NASDAQ: MU).
Micron Technologies Fuels Demand: Will Rambus Benefit?
Micron Technology is witnessing a surge in its high-bandwidth memory (HBM) business, primarily driven by the growth of AI applications. In its fiscal fourth quarter of 2024, Micron achieved a remarkable 93.3% year-over-year revenue increase, largely attributed to advancements in AI and data centers. Micron’s HBM3E chip delivers 50% more DRAM capacity and consumes 30% less power, further supporting generative AI technologies. Given that both Micron and NVIDIA utilize Rambus’s intellectual property, any growth could positively impact Rambus’s revenue. However, the immediate results have yet to reflect a substantial increase.
Rambus Awaits Its Moment in the AI Spotlight
On July 29, 2024, Rambus reported second-quarter 2024 earnings per share (EPS) of 33 cents. While revenues grew 10.3% to $132.10 million, they fell short of estimates, which anticipated $139 million. In terms of products, revenue increased 13% sequentially to $56.7 million, but only registered a 3% year-over-year increase from $55 million last year. Royalty revenue, however, experienced a notable jump of 38% year-over-year to reach $56.4 million. Rambus ended the quarter with $432.9 million in cash and equivalents, although its revenue growth has not been particularly striking so far. Their guidance for future earnings appears conservative.
Looking ahead to Q3 2024, Rambus expects license billings between $60 million and $66 million, product revenues between $62 million and $68 million, and contract revenue between $17 million and $23 million. The anticipated license billings suggest promising double-digit growth, hinting at a potential acceleration from the AI boom. Investors should be watchful for Rambus’s upcoming third-quarter results, set for release on October 28, 2024. The consensus estimates predict an EPS of 52 cents with anticipated revenue of $147.67 million.
Can AI Growth Propel Licensing and Royalty Revenue?
On September 4, 2024, Rambus introduced what is claimed to be the industry’s first HBM4 Memory Controller IP, aimed at enhancing AI workloads. This controller supports the advanced functionality of HBM4 devices, which have significant memory bandwidth requirements for the latest AI GPUs and accelerators. Neeraj Paliwal, Rambus’s Senior Vice President of Silicon IP, emphasized, “As Large Language Models (LLMs) surpass a trillion parameters and continue to expand, tackling memory bandwidth and capacity bottlenecks becomes essential for meeting the real-time demands of AI training and inference.”
RMBS Stock Seeks Stability in a Fluctuating Market
A descending triangle pattern often indicates bearish sentiment, featuring a descending upper trendline converging with a flat-bottom lower trendline. A breakdown occurs when the stock price dips below the lower trendline, while a breakout happens when it pushes past the upper trendline.
On October 9, 2024, RMBS broke out of its descending triangle by climbing through $41.22, reaching a peak of $45.59 before retreating. Currently, shares are nearing the $40.22 daily anchored volume-weighted average price (VWAP) support. The daily relative strength index (RSI) peaked at the 65-band and has since declined to the 46-band. Important Fibonacci support levels are identified at $40.20, $37.66, $34.77, and $27.92.
Rambus holds an average consensus price target anticipating an 88% increase, reaching $77.75, with the highest analyst target set at $85.00. Four analysts have given it Buy ratings, and the stock is currently trading at 29.2 times forward earnings.
Strategic Options for Investors: Investors optimistic about Rambus may consider cash-secured puts to acquire RMBS at the identified Fibonacci support levels and may also write covered calls as part of a wheel strategy for income generation.
Additionally, investors interested in bullish options can limit their potential losses and still benefit from moderate stock price increases through a bullish call debit spread.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
