Sell Rambus, Company Will See A Gradual Decline

| About: Rambus, Inc. (RMBS)

Rambus (NASDAQ:RMBS) has seen its shares get hammered after it was dealt an agonizing defeat after Micron Technology (NASDAQ:MU) won a controversial price-fixing lawsuit. Rambus was suing Micron over alleged activity that Micron executives sought to drive Rambus products out of the marketplace.

After Rambus failed to win the lawsuit, its shares fell more than 60% in a day. Rambus shares are down more than 56% for the year. There seems to be little hope for the company.

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I don't see Rambus being around five years from now. The company is losing money and its balance sheet is deteriorating. The company lost near a $100 million last quarter. In the last three years, Rambus has seen its long-term debt increase from $112 million to $186 million. The company's cash balance has also fallen by a $130 million since 2009. Cash balance has been deteriorating because management has been allocating capital inefficiently. The company bought back $81 million worth of stock last year. This is not a smart way of spending cash considering the company lost over $40 million in 2011.

Rambus has also had a difficult time managing its costs. The company just announced that they plan to cut 15% of the company's workforce in order to cut costs. In addition to cutting costs, the company is in trouble due to a decline in royalty revenue. Royalty revenue makes up the largest percentage of the company's top line. Royalty revenue fell 8.6% year over year.

Not only has revenue been falling, but the company has had a difficult time enforcing its patents. Patents are the main reason Rambus is able to gain royalties through licenses, but without proper enforcement, the patents mean nothing. The U.S. International Trade Commission turned down its case against Garmin (NASDAQ:GRMN). Rambus was claiming that Garmin infringed on several patents that are vital for their consumer electronics division.

While Rambus seems to be taking a hit on the semiconductor market, the company is focusing its efforts on the LED market. While it is good to see Rambus diversify there divisions, the company is going into a highly saturated industry.

Take a look at Cree (NASDAQ:CREE), which is a major player in the LED industry. However, analysts are expecting Cree's market share to fall by 50%.

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Morgan Stanley list a few reasons for Cree to see a drop in market share. They expect pricing pressure and competition to drag down margins. In addition to this, it is difficult to forecast the future for LED growth. Growth rates for the industry have been over 50%, but it is likely they will drop off soon. If this were to happen, Rambus would basically be entering at a time when growth is slowing in the LED market. There just is enough reason to think that Rambus' LED division will help them. The company is having problem staying profitable with its core business and is a late entrant to the LED market.

I don't see any positive signs for Rambus. Even if Rambus tries to save on costs, it still won't take away from the fact that the company is seeing a massive decline in revenue. The company's current cash balance should keep it afloat for sometime. However, with leverage increasing, the company is going to run into a major obstacle in the future. Rambus has a very limited future and investors should immediately sell Rambus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.