Investment Thesis
Rambus (NASDAQ:RMBS) delivered a lackluster outlook that saw its share drop 10% premarket.
Case in point, Rambus delivers middle-of-the-road guidance for Q3, while its share price is inflated for what it offers. More specifically, investors are being asked to pay around 26x forward non-GAAP operating profits, for a business that is likely to be delivering single-digit growth rates in a couple of quarters.
Altogether, I find myself neutral on this name.
Rapid Recap
Nearly a year ago, I stated,
I believe that Rambus’ prospects are strong, even though this investment thesis is not blemish-free. Essentially, I discuss what I believe is a questionable use of capital, particularly given the overall macro environment.
Ultimately, I believe that Rambus has compelling prospects, especially given its strong focus on being cash flow generative.

Author’s work on RMBS
In hindsight, this was a bad call. Not only has RMBS underperformed the S&500, but also, given its latest set of results, I’m now left with no choice but to downgrade this stock to a neutral rating.
Rambus’ Near-Term Prospects
Rambus develops advanced products that help move data faster and more securely to meet the growing demands of data centers and AI. They specialize in designing top-notch memory subsystems and invest in new products to expand their market and drive long-term growth.
Rambus is well-positioned for growth in the near term, driven by its leadership in DDR5 memory products, such as the RCDs and server PMICs.
As noted in their earnings call, Rambus is seeing positive customer reception for their new products. Moreover, they anticipate double-digit revenue growth in the next quarter due to continued strong performance in their core products and early contributions from newly introduced products.
And yet, despite their alluring prospects, Rambus faces several challenges. The transition from DDR4 to DDR5, while progressing well, requires careful production ramps. Additionally, the company is having to navigate some price erosion amidst increasing competition.
Also, the introduction of new products carries the risk of slower-than-expected adoption and qualification processes, which appears to be impacting its short-term revenue growth. A topic we delve into next.
Revenue Growth Rates Aren’t Strong Enough

RMBS revenue growth rates
Rambus guides for Q3 2024 to be up approximately 13% y/y to around $150 million in revenues. This is slightly less than the 14% y/y growth analysts were expecting.
As a company that is supposedly well-positioned with strong prospects, these fundamentals fail to live up to that narrative.
What’s more, consider that Q3 2024 was always going to be the easiest “near-term” quarter to compare against, given that Q3 of the prior year was down 6% y/y.
Consequently, what investors are now facing is a company where the best that it offers is right now taking place.
And once Rambus Q4 starts to come into view, its growth rates are likely to suddenly weaken further. And with each passing quarter, there’s an increasing likelihood that its revenue growth rates will decelerate and perhaps even turn negative by this time next year. That’s not a good setup for investors.
Given this line of reasoning, let’s discuss its valuation.
RMBS Stock Valuation — 26x This Year’s Non-GAAP Operating Profits
In the past six months, Rambus has been actively repurchasing its shares, deploying approximately $60 million towards buying back shares. Accordingly, I estimate that since the majority of its share repurchases took place in Q1 2024, roughly speaking its share repurchases took place at approximately $60 per share.
Today, given its premarket slump, its share price is $50 per share, which is a painful reminder that it’s very easy to spend money. But it’s rather more difficult to be astute capital allocators.
That being said, on a positive note, Rambus still holds about $430 million of cash and marketable securities. This means that this debt-free business has nearly 7% of its market cap made up of cash.
Furthermore, Rambus’ guidance implies that it will make somewhere between $60 to $70 million of non-GAAP operating income in Q3.

RMBS Q2 2024
This would be a sequential improvement from Q2 2024, see above. But then again, we are forced to question the sustainability of these profits, particularly given that investors are already being asked to pay around 26x this year’s non-GAAP operating profits.
The Bottom Line
Paying 26x forward non-GAAP operating profits for Rambus offers a poor risk-reward profile for investors.
Despite its leadership in DDR5 memory products and positive customer reception, Rambus faces significant challenges, including potential price erosion and the risk of slower-than-expected adoption of new products.
The company’s guidance for Q3 2024 reveals modest revenue growth that falls short of expectations, and its growth rates are likely to decelerate further in the coming quarters.
With such an inflated valuation relative to its expected performance, investors might find the potential returns insufficient to justify the risks. It seems Rambus’s stock might not be worth the extra memory cost!
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