Rambus: Big Drop In Share Price Doesn't Make Stock A Buy

| About: Rambus, Inc. (RMBS)

On Friday, Rambus (RMBS) dropped 18% after reporting disappointing Q2 earnings results. The three takeaways from the report are the big q/q drop in revenue, cash, as well as the reported quarterly loss. Revenue for the second quarter of 2012 was $56.2 million, down 11% sequentially from the first quarter of 2012. Cash, cash equivalents, and marketable securities as of June 30, 2012 were $203.2 million, a decrease of approximately $29.3 million from March 31, 2012.

With the drop, the stock is now down nearly 80% off its 52 week highs and over 40% year to date as the company is facing numerous issues, with the major issue being Elpida's bankruptcy. That has created uncertainty of royalty payments Rambus is due to receive. Despite the stock collapse, analysts are still bullish on the stock with a mean target of over $7 a share, upside of about 60% from today's price levels. However, the downside here may still be considerable.

The company has an enterprise value of about $397 million. That calculates as $203 million in cash and marketable securities, $140 million in debt, and a market cap of $460 million. With 2,445 patents at the end of last year, that suggests the company is trading at an EV/patent multiple of about $162k/patent. Although there are only two other patent pure plays out there, the $162k/patent figure is at the top end of the comp range. InterDigital (IDCC) is trading at an EV of under $40k/patent while Tessera (TSRA) is in the $160k/patent range. A drop to IDCC's level would send the stock significantly lower. A drop to the mean of $100k/patent would lead to an EV of $245 million and a per share equity value of about $2.80/share.

On a private market comparison basis, RMBS is undervalued if you are taking the mean but I think a more reasonable route here is comparing Rambus to the lower end of patent private market transactions because of the limited amount of information available about patents, which still suggests considerable downside. The lowest transaction seen as of recent has been Tegal's (TGAL) patent transaction which averaged $114k/patent. That valuation for Rambus' patents is far lower than the $162k/patent RMBS is currently being valued at.

Rambus is getting close to where it could be considered for an entry but it still has ways to go. A price in the $2 range would make it interesting with an ev/patent of less than $100k. A rebound in Rambus could occur quickly as investors are still thirsty for patent plays. Recently, IDT (IDT) announced the spinoff of its patent and licensing subsidiary. Also, Kodak's patent auction is coming up shortly which could provide a strong catalyst for interest in patent stocks.

Disclosure: I am long IDCC.