Why Rambus Stock Can Rally From $11 to $100

Rambus Inc. This Tech Stock is Primed for a Rally

Rambus Has the Technology But Needs to Deliver

As the demand for data solutions continues to accelerate, companies that develop products and services to help with the movement of data via a network or the cloud will be key.

A small-cap contrarian play on the data theme is Rambus Inc. (NASDAQ:RMBS), a developer of hardware, software, and services used to move data faster and securely from data centers to mobile devices.

This segment has strong tailwinds and includes growth areas such as Big Data, Internet of Things security, mobile payments, and smart ticketing.

Rambus stock had been drifting for the majority of 2018, but it recently caught on fire, up a scorching 50% this year.

Despite the upward move, RMBS stock is still down from its 52-week high of $14.30, and well off its $26.00 price in January 2010 and the over-$100.00 in 2000 during the tech-sector euphoria.

Chart courtesy of StockCharts.com

And while there’s no guarantee that it can ever recover its $100.00 price, RMBS stock could double sometime down the road.

My Bullish Thesis for RMBS Stock

Rambus Inc.’s revenue picture has been decent, with its annual revenue rising from $296.6 million in 2014 to $401.1 million in 2018.

The company recorded strong revenue growth in 2016 and 2017, prior to experiencing a flat 2018.

Fiscal Year Revenue (Millions) Growth
2014 $296.6 9.2%
2015 $296.3 -0.1%
2016 $336.6 13.6%
2017 $392.1 16.8%
2018 $401.1 0.02%

(Source: “Rambus Inc.” MarketWatch, last accessed April 26, 2019.)

There appears to be some stalling in 2019, with Rambus expected to report flat growth to $401.07 million, followed by five-percent growth in 2020 to $421.27 million. (Source: “Rambus Inc. (RMBS),” Yahoo! Finance, last accessed April 26, 2019.)

The slow growth is a concern, but hopefully Rambus will be able to produce better growth later, given the strong tailwinds in the data solutions market.

Rambus produced positive earnings before interest, taxes, amortization, and depreciation (EBITDA) from 2014 to 2017, prior to recording a negative result in 2018.

Fiscal Year Revenue (Millions) Growth
2014 $110.9 29.5%
2015 $106.7 -3.7%
2016 $87.7 -8.4%
2017 $112.2 14.8%
2018 -$44.7 -139.8%

(Source: MarketWatch, op cit.)

The company generated positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS) from 2014 to 2016, prior to registering two straight years of losses.

Fiscal Year GAAP Diluted EPS
2014 $0.22
2015 $1.80
2016 $0.06
2017 -$0.21
2018 -$1.46

(Source: Ibid.)

After adjustments, Rambus Inc. made $0.92 per diluted share in 2018.

Estimates call for the company to report $0.90 per diluted share in 2019 and $0.94 per diluted share in 2020. (Source: Yahoo! Finance, op cit.)

Rambus had positive free cash flow (FCF) from 2014 to 2017, growing in each year, prior to declining in 2018.

Fiscal Year FCF (Millions) Growth
2014 $69.7 57.1%
2015 $70.3 0.8%
2016 $84.0 19.4%
2017 $108.1 28.7%
2018 $76.4 -29.3%

(Source: MarketWatch, op cit.)

Analyst Take

In my view, Rambus Inc. has what it takes to benefit from the demands for data solutions. The company just needs to convince the stock market via results.

Insiders seem to be positive on RMBS stock. Over the past six months, they bought 266,775 common shares and sold 90,958 shares. (Source: Yahoo! Finance, op cit.)

Rambus stock’s valuation looks intriguing, trading at 12.2 times its 2020 EPS and having a price/earnings-to-growth ratio of 0.97.