Is Rambus the Next 27 Bagger?

Many investors remember 1999 when Qualcomm (QCOM) had a run from $3 (split adjusted) on Jan 1, 1999 to $83 (split adjusted) at the end of the year. QCOM was a 27 bagger in a single year. The QCOM run changed the lives of ordinary people. It made millionaires out of schoolteachers and preachers who invested and held throughout 1999. In short, it was like winning the lottery. Of course, those were the bubble years and something like that could never possibly happen again…..or could it?

On June 8th, when Rambus was at 14, I shared an article with Seeking Alpha readers telling you that RMBS was about to make a run. Less than a week later the stock is now in the mid 17s and headed higher. As recently as February 20, 2009, just 4 short months ago, Rambus stood at $6/share. Is it even remotely possible that Rambus could be a 27 bagger in a year like Qualcomm was in 1999? That would mean Rambus has to get to $162/share by February 19th 2010. The surprising answer to this question is yes. While it may take Rambus two years to get to that level, it certainly is possible that Rambus could be there in 8 months.

How can that be?

First, you don’t have to believe an anonymous internet poster (NukeJohn), even though I have given you recent predictions on TSRA and TIVO that have come to pass. In 1999, there was a fund manager (Kevin Landis of Firsthand Capital Management) that picked QCOM as the tech stock of the year and guess who he picked as the tech stock of the year in 2009? You guessed it: RMBS. Watch the last minute of this 4 minute video.

How can Rambus possibly have the potential to be a $162 stock?

First, I should tell you that the late Fred Hager of Hager Technology, one of the top technology advisory services in the bubble years, predicted that one day Rambus would be a $1000 stock. Although Fred took a tremendous amount of abuse for that ill fated call (who knew the U. S. justice system would take 10 years?), Mr. Hager's heirs might one day still have the last laugh. So how is it possible for Rambus to get to $162 in a year or two….or to a $1000 in 3-4 years? Please read on….

The History of Rambus

In the 1990s, two PhDs by the name of Mike Farmwald and Mark Horowitz had dinner one night in Palo Alto, CA where they came up with idea that solved the biggest problem facing the computer industry at that time. Computers were running faster than the memory connections, and even the engineers at Intel (INTC) and IBM (IBM) couldn’t solve this memory bottleneck problem. But two young enterprising American inventors came up with the solution and formed a company called Rambus.

The story is too long to tell you from the start, but this link can give you most of the information. Unfortunately, after these brilliant engineers founded Rambus, the memory manufacturers, along with JEDEC (the industry standard organization) simply started “cherry picking” Rambus’ intellectual property and incorporating it into the standards. You will hear many people tell you that Rambus tricked the industry into standardizing on their technology, but this was simply not the case.

In fact, Judge Ronald Whyte of the Northern District of CA held an extensive trial on this very issue. Rambus’ conduct while a member of JEDEC was examined with a fine tooth comb, and Rambus was completely exonerated. After a seven week trial, the jury came back in after about three hours with a unanimous verdict.

The FTC was another major roadblock Rambus had to clear. Even after the FTC’s Chief ALJ completely exonerated Rambus in his Initial Decision, the politically motivated FTC full Commision overturned their own ALJ and convicted Rambus of “exclusionary conduct” and attempted to get them to give up their patent rights. But the Court of Appeals of the Federal Circuit slapped down the FTC, and then the U.S. Supreme Court refused to hear an appeal. The FTC dropped the case recently, which has helped clear the way for Rambus to start collecting royalties on the DRAM Market and the controllers associated with every DRAM device. Infringement has been proven in the Northern District of CA court, where Rambus was forced to win all three phases of a trifurcated case.

This case started in 2000 when Hynix filed charges against Rambus as part of a coordinated scorched earth litigation policy to put little Rambus out of business. Rambus won all three phases, but the final verdict did not come out until March of 2009. If they really want to appeal the loss, Hynix now has to pay the 250 million dollar supersedes bond and sign a lien of a 300 million dollar fab by the end of this month. Of course, one alternative to this financial pain is to just settle with Rambus on these new reasonable rates Rambus has offered the industry.

In addition, Rambus has an antitrust case against Samsung, Hynix, and Micron (MU) in California State Court in San Francisco. This case started in May of 2004, and it is finally coming to trial in September. Over the past five years, the defendants have tried numerous ways to get this case dismissed, or to delay the start of this case.

But the Honorable Judge Richard Kramer just two weeks ago confirmed his tentative ruling that this case will start in September. This news has not been reported by the mainstream business press, but it was confirmed in Rambus’ recent UBS conference presentation.

Significance of the AT Case

Unless you have followed Rambus closely for 10 years like I have, you may not understand the significance of this Antitrust price fixing case they have against Samsung, Hynix and Micron.

First, you should know that Samsung and Hynix signed plea agreements admitting that they fixed prices, and they both had several executives go to jail. Micron turned the other cartel members in to the US Department of Justice in exchange for amnesty. This story has been covered by major news media in the past. For example, Business Week first started putting together the pieces of the puzzle over three years ago in this excellent article. Then, just a year ago, Bloomberg did an expose on the DRAM Price Fixing Cartel.

In essence, these defendants have already been proven guilty of DRAM price fixing, and now Rambus can tell the world (and a California jury) why they fixed prices. In fact, a few emails have already been made public in the early stages of this case. The damages in this Antitrust price fixing case are huge. Rambus lost billions of dollars in royalties when the DRAM manufacturer’s actions convinced Intel to shy away from RDRAM as the standard memory for future Intel PCs.

In fact, in recently revealed court documents, Rambus alleges the damages to be 4.32 billion dollars, which are then subject to automatic trebling because this is a Cartwright Act case.

Therefore, the total damages facing the DRAM manufacturers approach 13 billion dollars. With Rambus having approximately 104 million shares outstanding, that is over $120/share in past damages alone from DRAM manufacturers (this doesn't include controller manufacturers).

Until last week it appeared that the stakes were so high that the memory manufacturers couldn’t afford to settle, and it was possible the cases could go on for years with appeal after appeal.

So what changed last week?

Just this past Thursday in after hours, it was reported that Rambus and the European Union have reached an agreement whereby the EU would drop charges against Rambus (following the lead of the FTC).

In exchange, Rambus would license the DRAM manufacturers and controller manufacturers with very reasonable rates. What is reasonable? Back in 2000, Rambus signed a license for DDR with Samsung for 3.5% and with Hitachi for 4.25%. Most Rambus long term shareholders (such as myself) were expecting at least 4.25% royalties on DDR2 and DDR3, and possibly 5-6% or more.

But Rambus has decided it makes business sense to bury the hatchet and move on, so they have offered the EU a very reasonable rate and this offer will be available to any and all takers. However, if a company doesn’t accept this rate (which includes a "most favored nations" clause), they will face much higher rates in litigations with Rambus.

Although Rambus has negotiated these rates with the EU, they have essentially offered these rates as “most favored” worldwide rates to any company who is ready to sign.

The terms and rates Rambus has negotiated with the EU were printed in an official EU publication and are as follows:

11. Rambus's 13 May proposal offers a bundled five-year worldwide licence for future DRAM products for all of its patents for SDRAM, DDR, DDR 2 and DDR 3, whereby it commits not to charge for SDRAM and DDR. The offer does not cover past royalties.

12. For chips, the following would be the maximum royalty rates:

(a) SDR DRAMs — subject to compliance by the licensee with the terms of the license, the licensee will be granted a royalty holiday during the term of the license on SDR DRAM devices;

(b) DDR DRAMs — subject to compliance by the licensee with the terms of the license, the licensee will be granted a royalty holiday during the term of the license on DDR DRAM devices;

(c) DDR 2, GDDR3 and GDDR4: 1,5 %;

(d) DDR 3: 1,5 %.

13. For Memory Controllers, the following would be the maximum royalty rates:

(a) SDR Memory Controllers: 1,5 % per unit of selling price until April 2010, then dropping to 1,0 % ( 1 );

(b) DDR, DDR2, DDR3, GDDR3 and GDDR4 Memory Controllers: 2,65 % per unit of selling price until April 2010, then dropping to 2,0 %.

14. The commitment will be valid for a period of five years from the adoption date of the Article 9 Decision. The licence grant will expire at the end of this five-year period, irrespective of the signing date of the licensing agreement. Licensees will have, after a one year minimum licence period, an unconditional opt-out to the licenses before expiry of the duration of the contract.

This weekend, the New York Times had an article that stated the following:

Any company that wants to make DRAM, or dynamic random access memory, has to pay Rambus for the design it developed. The chips are used in personal computers, servers, printers, personal digital assistants and cameras. Worldwide DRAM sales were $34 billion last year.

Rambus said Friday that it would cap the fees it charged for licenses over five years for certain memory types and memory controllers. The European Union said Rambus also promised that any future fee cuts would benefit the entire market.

The above statement from the New York Times article is correct, but they left off a couple of items. First, they said "personal computers, servers, printers, personal digital assistants and cameras". They left off some major products that use DRAM (or graphic DRAM) chips including cell phones, HDTV televisions, and camcorders. These are high volume products that make the size of the controller markets huge. The size of the controller market dwarfs the 25-35 billion dollar DRAM market (which Rambus will get 1.5% on).

Here is an exchange from Rambus’ Q1 2008 conference call transcript (pages 8-9) which is available from Seeking Alpha. It appears that the Total Available Market (TAM) for controllers is in the "hundreds of billions" as was stated in this Q1 2008 conference call.

Sharon Holt - Senior Vice President of World Sales, Licensing, and Marketing

Yes. Hi, Mike, this is Sharon. So… yes, and I realize when we say DRAM controllers that that could be confusing. Let me give you a couple of examples before I jump to the general. So a system that most for us are familiar with is a typical PC. So in a PC, obviously you have a CPU usually from Intel or AMD that’s either connected through a bridge or directly to memory. Whether it's the CPU or the bridge that’s connecting directly to the memory, that device would include what we would call the DRAM controller. So it's basically some logic that helps transmit messages back and forth between the memory and the CPU. So in a PC system, that's what the architecture looks like. In other types of systems, it could be an ASIC or some other kind of chip set that is talking to the memory and in that case, that ASIC or chip set would include a memory controller. Does that help?

Mike Crawford - Riley Investment Management

Is there any way to kind of put a TAM on that?

Sharon Holt - Senior Vice President of World Sales, Licensing, and Marketing

So it's… first of all, when we look at it, we are looking at certain types of memory devices at a very high level. If you are looking at the market itself, it’s quite large. As you know, the DRAM market is $30 billion a year. The controller market is multiple times that much larger if you just add up all the Intel microprocessors, all the AMD microprocessors, other chips sets and ASICs and other specialty devices that talk to memory, we're talking hundreds of billion of dollars, that's at the top level and then of course for us, the TAM would be some percentage of that depending on the royalty.

Now, let's review what the Wall Street Journal said when they announced the EU Rambus settlement...

Rambus will offer lower royalty rates to customers of its chip technology, but it will ask for more customers to pay royalties, this person said.

Rambus will ultimately get the 2.65% (2% after 4/2010) for chips with embedded controllers that interface to DRAM chips. If the companies don’t pay willingly, they will ultimately pay a lot more unwillingly. This is actually a good deal for the controller manufacturers because Samsung had signed a license in 2000 that had a 5.5% rate on controllers. If we are conservative and say the controller market is 200 billion (instead of hundreds of billions) and we assume that only 30% of the market signs up in the first year, that is still 2.65% on 60 billion dollars or 1.59 billion dollars in revenues from controllers and 375 million in revenues from DRAM. Remember, this does not include past damages for DRAM or controllers. Past damages could easily exceed 1.5 billion on DRAM and 3 billion on controllers when one considers the amount of products sold in the past decade.

Hynix and Samsung are now virtually forced to agree to these rates, because if they turn them down, they are on the hook for 12 billion dollars in damages in the AT case. If the parties are willing to pay for back damages, Rambus will probably let them out of the AT case.

The other thing I was thrilled to see is that DDR4 is not included in this EU settlement. Just recently, Rambus put JEDEC and the whole industry on notice that they had five new technologies available for licensing. Rambus knew that, once again, the DRAM manufacturers were considering using Rambus IP for the next standard currently known as DDR4. Rambus expects to be paid on these technologies if they are included in the standard. I suspect that Rambus has already sent JEDEC a letter offering Reasonable and Non Discriminatory (RAND) rates. I can’t imagine the rates Rambus will demand for their newer technology will be below 4.25%, and I suspect the rates are closer to 5%.

Summary

Rambus has lowered their royalty demands, but when they start getting paid on all the products that have DRAM, even these lower royalties will justify a price well into triple digits. Rambus may never be the $1000 stock that Fred Hager talked about, but it could easily be $300-$500 in 3 years.

In my opinion, we will see settlements soon, likely starting with Elpida. Rambus has drawn the line in the sand. They have said “here are our rates”, take it or leave it. Once one or two companies start taking it, the flood gates will open up, and most companies will have to take it. Those that don't sign licenses will wind up paying a helluva lot more.

As much as I hate to admit it, litigation has become a core competency at Rambus. As recently as a week ago, Harold Hughes (Rambus CEO) said he could pass the bar exam, and I can sympathize with him. As a Rambus investor for ten years, I've learned more about law than I care to know, but it has been fun learning how to handicap patent cases. This has served me well in other investments like TSRA and TIVO.

Although I was initially disappointed with the rates, I now see the brilliance of this strategy being executed by Rambus. The part I like best is that the 5 year licenses the DRAM manufacturers will be forced to take stretch out four years after the F/H patents expire. Long before then, the DRAM market will transition to DDR4/XDR2, where I believe Rambus will be getting paid 4 to 5% royalties.

Rambus should soon be at $35-40/share. I would not be surprised to see a run similar to the run in January 2006 when the stock went from 16 to 36 in 11 trading days. I am raising my 3 month price target to $45 and my 1 year price target to $120.

While we may not quite repeat QCOM's 1999 performance, Rambus will still be one helluva investment over the next year.

Disclosure: Long RMBS, TSRA, TIVO; Short MU

Comments

[Robert0713:]

Oh, yeah. About "somebody" buying RMBS to avoid the fees. A couple of problems.

1) why would shareholders sell for less than the discounted present value of the stock and earnings (that's economist speak)?
2) if there is a single company that buys then either:
i) it becomes the Big Bad Wolf to the rest of the industry. nothing changes.
ii) it releases the patented tech to the public domain. why do so?
3) if a combine of companies, how do they avoid AT? how much do they pay? see 1)

Jun 16 03:28 PM

[maxiedog:]

FB2, as you imply - it is the response that matters and not the nature of the inducement. It appears to me that RMBS hold the upper hand and the infringers are going to pay. This means a rise in the SP. I am happy to be shouted down but it seems very obvious.


On Jun 16 09:12 AM FloridaBoy2 wrote:

> Maxiedog,
>
> I am not sure if it is a pistol or an olive branch RMBS is holding.
> I would like to believe it is an olive branch as they have a lot
> to gain
> with future royalties on other patents. I am long with a stop and
> the next news I would like to see is a signed royalty agreement.

Jun 16 04:24 PM

[AssetReset:]

I have just gone through the last three articles on RMBS
I have justed checked the posting pattern on most of the users posting on the RMBS articles and pushing a BULL slant
All of the posters comment all most exclusively on RMBS

WHY ARE YOU PUSHING RMBS?

I am not saying it isn't a good investment
But cheerleaders have me wary

(Here come the negatives from the dozen cheerleaders)

Jun 16 05:10 PM

[FloridaBoy2:]

Maxie,

This is not the only patent infringement in the tech arena...but it may be the biggest one financially. It is easy to see why the companires wanted to avoid paying royalties and litigate Rambus to financial death. I am not a lawyer and am only interested in this as a, hopefully, profitable trade/investment. Actually, Rambus came up on a stock scan last Friday and I got interesed. Then NJ posted the article. :- )

Jun 16 05:17 PM

[FloridaBoy2:]

Here ia another post from March of this year.

seekingalpha.com/artic...

Jun 16 06:11 PM

[Robert0713:]

For those that have forgotten, or never knew, memory has been patented in the past (WikiPedia):

Dr. Wang's patent was not granted until 1955, and by that time core was already in use. This started a long series of lawsuits, which eventually ended when IBM paid Wang several million dollars to buy the patent outright. Wang used the funds to greatly increase the size of Wang Laboratories which he co-founded with Dr. Ge-Yao Chu, a school mate from China.

Jun 16 09:45 PM

[johngonole:]

I know nothing about Rambus. I first read this story and got very excited. Thanks to the posters who pointed out the pump and dump scheme. This article (which may be accurate) with all the back and forth poster belows reminds me of the early days of internet investing where pumper and dumpers were everywhere. I'll research Rambus if I have time.. But all of the info cited above is public knowledge. Its not been hidden under a rock. Thus the market has probably priced in the risk to reward on this stock. Sure it could double. But markets don't usually mis price a stock by 27 times. If it does go up 27 times it will be on information not currently known. Nothing above was written by the author was previously unknown.

Jun 17 02:25 AM

[fun_guy_ir:]

NJ,

Clearly you are long on RMBS, but if you trully believe what you write ... what percentage of your personal $$ has been invested into RMBS?

Jun 17 04:21 AM

[Robert0713:]

>> But markets don't usually mis price a stock by 27 times. If it does go up 27 times it will be on information not currently known.

In March 2009, fully solvent life insurance companies were selling at $.20 to $.40 a share. Yes, the Market is known to be an idiot. The Calf Market of March to May was driven by Joe Six Pack (the kind of guy who lives on sites such as this) investors who bid the market broadly to reasonable level, not Big Money. If, and when, Big Money returns (and gets the hell out of oil futures so we can get back to reasonable gas prices), a 2 or 3 bagger can happen to many stocks; including those life insurance companies which still trade at 1/3 book. Yes, the Market can be an idiot. Unless you wish to assert or believe that Big Money has access to information not available to Joe Six Pack (bottles, not abs).

Jun 17 08:34 AM

[This Game i...:]

Thanks for the great short idea. Let's see: Almost a half-billion in cumulative losses since 1990. Never turned a profit. 20 years in business, never made money. That's okay, they make it up in volume. $120MM per year in SG&A versus $140MM in sales.

I know, I know...it's a litigation story. Yeah, like they're gonna distribute that $13Billion to the shareholders. As if the defendants even have $13Billion. MU will declare bankruptcy and the other two will retreat to Korea. This company is worse than a biotech. You may get a bump in share price upon the anouncement of the judgement; but 5 years from now this company will still be losing money.

Jun 17 10:55 AM

[Nuke John:]

On Jun 17 04:21 AM fun_guy_ir wrote:

> NJ,
>
> Clearly you are long on RMBS, but if you trully believe what you
> write ... what percentage of your personal $$ has been invested into
> RMBS?

About 25%...it is my largest holding by far....with TiVo second at about 10% and TSRA third at about 8%.

Jun 17 10:09 PM

[InvestBaboo:]

RMBS has an average volume of 2.4 m shares. Maybe you can manipulate this a day or two but you can't for weeks in a row.

As per the charts RMBS generated a strong buy signal the last week of April. It has been on a run since stopping every now and then consolidating and moving higher. Going purely by the charts this stock looks like a good investment irrespectivf of all the hype published in this article. I would buy it at current price and put a stop loss at 15.5.

Jun 18 02:13 AM

[beandog:]

JEDEC claiming Rambus secretly "fooled everyone" is a joke. You're talking about technology Rambus has that was way ahead of its time..from changing the then 20mhz to 500mhz memory speed. Rambus' chip design was totally novel and mind-bloggling that everyone would have wondered where it came from before JEDEC adopting it. Truth is, all the committee members knew. Most just want to steal from Rambus. It was Toshiba, a customer of Rambus, who encouraged Rambus to join JEDEC. Toshiba knew Rambus had powerful patents and thought Rambus could benefit the industry.

Besides, it was standard practice that JEDEC members did not have to reveal their patents (but that those patents that get adopted would charge reasonable rates), but Rambus revealed all of theirs (pending patents) anyways.

Is Rambus the next Qualcomm? beanieville.blogspot.c...

Jun 20 02:39 AM

[flashguy99999:]

great call!!! it took 3 days to discredit the author.

Jun 22 07:35 PM

[John Hagelgans:]

I wouldn't necessarily say he's discredited (if a month from now things don't recover then I will concede). Obviously, he's been with the stock longer than the last five minutes and must realize that it's volatile. Anyone who got long due to this advice probably doesn't feel too great right now (after hours it's down 2.45 to 16.25).

In any case this has the look of a great trading stock you might want to try some option ratio spreads on it, wait for the volatility to dampen somewhat first.

Jun 22 09:05 PM

[rundowndown:]

In reality, RMBS wasn't a buy for 2Q EPS. It's all about future settlements, licenses, the TAM, the 13 billion in the AT, the EU settlement setting settlement standards. RMBS doesn't go to 100 a share based on a few pennies difference in EPS. The convert may dilute some but also extends financing and takes advantage of the stock's run and the market rally, which I believe is coming to an end soon. I look for a major move in the PPS beginning in mid to late July, higher.

Jun 22 09:45 PM

[vmax:]

I read that Firsthand Funds liquidated it's entire position in Rambus earlier this year. I think you can find that on their website under commentary. So, I don't believe that Rambus could be the 2009 stock of the year for Firsthand.

Jun 23 09:26 AM

[vmax:]

Also, I read that Firsthand liquidated all of their Rambus holding because of the verdict in January that Rambus could not enforce patents on Micron. That verdict resulted in a trial stay for patent infringement in the California court against the other dram manufacturers which was scheduled for February 17.

Anyone know what is going on with these 2 cases?

Jun 23 09:32 AM

[Nuke John:]

The DDR2 Patent trial in Northern District of California has been stayed pendiung the outcome of the CAFC appeal of the DE ruling by Judge Robinson. However, the attempts to stay the AT case inn CA state court and to stay the ITC case (against Nvidia, HP, et al.) have both failed. Judge Kramer has ruled that DE spoliation ruling has no effect on his case and he is proceeding. Likewise ALJ Essex at the ITC has ruled the same.

One thing you may wish to note is that Judge Robinson's remedy goes against established case law, and, IMHO, will be overturned at the CAFC. She ruled the patents were unenforceable. She tried to stretch a spoliation ruling into an inequitable conduct ruling (which is really fraud on the patent office). Fortunately for Rambus investors, inequitable conduct has a much higher burden of proof. The DRAM cartel wasn't even able to prove spoliation in a fair court (HJW's court), so there is no way the CAFC will allow Robinson to stretch a "questionable" spoliation ruling into a "fraud on the patent office" inequitable conduct ruling. Also, the Aptix ruling (see below) has already stated that unclean hands are not justification to make the patents unenforceable.


www.ll.georgetown.edu/...

excerpt.....

The district court, however, abused its discretion in rendering the patent unenforceable for unclean hands. While unclean hands based on litigation misconduct may serve as a basis for sanctioning the litigant engaging in such conduct, it does not infect, or even affect, the original grant of the property right. Unclean hands based on litigation misconduct differs from inequitable conduct in the procurement of the patent right because the latter taints the property right itself and provides a basis for rendering the patent unenforceable by any party. The district court abused its discretion by extending the sanction for litigation misconduct beyond Aptix - the party who engaged in unclean hands - and rendering the property right unenforceable.




On Jun 23 09:32 AM vmax wrote:

> Also, I read that Firsthand liquidated all of their Rambus holding
> because of the verdict in January that Rambus could not enforce patents
> on Micron. That verdict resulted in a trial stay for patent infringement
> in the California court against the other dram manufacturers which
> was scheduled for February 17.
>
> Anyone know what is going on with these 2 cases?

Jun 23 11:41 AM

[406597:]

I was surprised as well to see that Firsthand liquidated their position.

Jun 23 01:35 PM