Rambus: DDR5 Leader Positioned To Thrive As AI Shifts To Inference

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Rambus, a $4.7 billion semiconductor company, enhances data storage and processing speed through advanced memory subsystems, addressing critical bottlenecks amid the growing demand for AI, 5G, and IoT...

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Michael Vi/iStock Editorial via Getty Images  Rambus Inc. (NASDAQ:RMBS) is a $4.7 billion semiconductor company that, broadly speaking, works to enhance the speed and efficiency between data storage and data processing, through advanced, next-gen integrated circuits and memory chips. Specifically, the company offers high-performance memory subsystems to clients that work with computationally intensive systems. Rambus, on its website, refers to this as \"solving the bottleneck between memory and processing\". Considering the prevalent shift towards AI applications, 5G, widespread IoT implementation, addressing this bottleneck will continue to become critical. Rambus, due to its strong positioning along this tech transition, has been seeing solid growth on its financials. Its topline has been soaring, along with its operating income, and EBITDA. Moreover, it boasts a very healthy balance sheet with zero long-term debt, and is generating strong operating cash flows. Compared to its peers, the company's valuation seems attractive to me, and I think it's a great opportunity for investors to align themselves, not just with AI proliferation in general, but specifically to AI's shift from the training phase to an inference one. While, during the early phase of the AI boom, there was strong emphasis on the training of models and computer learning, the tech industry is now looking towards inference, whereby trained models are applied to live data in order to carry out real-time predictions, or decisions, without the involvement of a person. This catalyzes the demand for advanced memory subsystem resources with high throughput. This is where DDR5 comes into play. This of course, refers to the 5th generation of Double Data Rate, which, through its faster speed and higher efficiency, is critical in terms of AI adoption. Rambus is solidifying its status as a leader in the DDR5 market, with impressive product expansion efforts, and being the first in the industry to introduce advanced DDR5 components and related products. By doing so, it is and positioning itself well to capture a significant share of the rapidly growing DDR5 market. In addition to its product segment, it also has a royalty segment, which reels in about 43% of total revenue. It holds license agreements for its patented inventions with top industry players such as AMD, Broadcom, Nvidia, Samsung, and many others. Together, the company is well positioned to capitalize on both the AI-driven demand and the broader technology upgrade cycle. Finally, I'll make a brief comment on the technical side. Although in the last 12 months, RMBS stock has fallen by nearly 10%, compared to the S&P 500's climb of about 40%, its SMA20 has recently overtaken its SMA50, which might be a signal for a bullish breakout. Finviz Although on its own this may not be very convincing as a climb indicator, it does tie in to my broader thesis well that the stock is on the brink of a significant take-off. Performance Assessment During the third quarter of the year, RMBS came in with strong topline growth, with its revenue for the period jumping to $145.5 million, compared to $105.3 million in Q3 of 2023. This translates to a 40% YoY surge on the topline, and was driven by strong performance on both the royalty and product revenue segments. Starting off with the royalty segment, the company, during the quarter saw its royalty revenue more than double from $28.9 million to $64.1 million. In fact, when compared to the entire royalty revenue of $150 million in FY23, RMBS in only the first three quarters has surpassed that figure with a YTD total of $168 million. This is, of course, encouraging, considering that semiconductor companies are increasingly adopting tech developed by Rambus for its systems. I find that to be a strong indication that the company is positioned well to soar alongside the AI boom and the increased computational power it demands. The product revenue segment also saw a jump this quarter, amounting to a 24% increase from $52 million to $66 million, driven by increased demand of memory interface chips. Although this is not as significant as the climb seen on the royalty side, I believe it holds more sustainable long-term potential, given the brand value benefits it would bring to Rambus, as a next-gen semiconductor player in the market. As RMBS continues to focus on new product launches, such as its recently launched PCIe 7 IP solutions' suite, and a new Client Clock driver chip offerings, I believe its market position will continue to solidify. Additionally, I am attracted by RMBS' efforts in working towards establishing a leadership position in the space of the wider DDR5 family. The DDR5 SDRAM market, was valued at $8.12 billion in 2023, and is expected to surge to nearly $40 billion by the end of 2030. With a much larger ecosystem to operate within, and booming demand in data centers and AI computation in general, I expect Rambus to see significant growth on its DDR5 RCD side. The progress on the DDR5 PMIC side is also quite promising, with the introduction of the DDR5 PMIC family of products, which include the semiconductor industry's very first extreme current server PMIC. With the DDR5 family showing a lot of traction with customers, the company expects to ramp up production of PMICs significantly through 2025 and beyond, in order to meet demand. The company's specialization in power management chips could serve as a launchpad for future growth, as next-generation ICs continue being developed. This goes beyond PMICs, and could encompass a wide array of technologies, each of which collectively contribute to enhanced memory performance, as AI applications continue to dominate various areas. Moreover, I believe AI is pushing beyond its initial learning phase where models were being trained, and more towards inference, and the operational side in particular. This trend is going to be crucial in the growth of companies like RMBS, that are positioned to rise alongside the boom in AI-related computational demand. During the quarter, operating income more than doubled from $32 million to over $65 million. Even more impressive was that its cash flows from operations during the quarter amounted to $62 million. For context, during Q3 last year, the company's operating cash flow was less than $52 million. This puts the company in a stronger position to be able to invest in further R&D to launch new products as computing requirements continue to advance. This also brings me to Rambus' strong balance sheet, with its debt completely paid off, and its equity continuing to rise. With its strong cash generation, it stands as a company well-positioned to finance additional product expansions, and meet the demand for faster and more efficient computing components and semiconductors. SimplyWall.St With a strong balance sheet, not only is RMBS able to continue expanding its DDR5 product range, and raising the bar higher in the industry, but is also able to return value to its shareholders, over the long term. In fact, Q3 has been the fifth consecutive quarter of buying back shares, and spent $50 million towards achieving this in the latest quarter alone. Finally, the EBITDA side of the company also highlights how successful the company is at enhancing its profits. During Q3, it saw its EBITDA climb by 85% to $72 million, which was its highest ever quarterly EBITDA figure. Overall, the hard numbers point to Rambus going through solid performance, which highlights its advantageous positioning amid the AI boom. As the AI landscape continues its transition towards optimizing inference capabilities, RMBS is likely to further grow in terms of its topline, and EBITDA, whilst leveraging its impressive cash flows to invest in continued innovation and research. Valuation I've taken my preferred method to gauge the value of RMBS, taking a look at its peers, and comparing how they are priced in terms of their forward-looking EPS figures, and EPS growth rates. I've assumed that earnings are the most important metrics the market factors in when assigning value to a stock, and any premium applied to a stock would directly be translated to the growth rate on its EPS. To achieve this, I have plotted a scatter graph using data from 15 players in the semiconductor equipment space: Author As we can see by the distribution above, most players fall beneath the trend line, which indicates that their growth rates are low, according to the relationship suggested by the line of best fit. AVGO and AMD also have really high forward-looking growth figures, but their high PE ratios make them relatively overpriced. Three stocks are nicely positioned in the top left section, which suggests they have high-growth rates, given their forward EPS growth rate. These are QRVO, RMBS, and TSM. While all three have a growth rate of over 10%, TSM's PE ratio (fwd) is quite high at 28.5, while QRVO and RMBS seem the most undervalued with ratios of 16.15 and 20.91, respectively. While RMBS does seem like the pricier option of the two, it does have a slightly higher growth rate, at 10.61%, compared to QRVO's 10.30%. Even if we accept QRVO as being better valued, it still means RMBS is the second-best stock in terms of its value, among 15 peers in the semiconductor equipment space. It is very much in the buy zone. Risk to Thesis One risk I see to my investment thesis is that the management seems to not have much skin in the game. Normally, when I am interested in investing in a company facing strong tailwinds and booming demand, I would prefer it to have at least a 20% insider ownership, which is an appropriate level pointing to the fact that the interests of the management and shareholders are aligned. Unfortunately for RMBS, less than 1% of its outstanding shares are held by company insiders. To make things worse, 2024 has seen some significant selling by insiders, which once again doesn't seem like a very reassuring sign: Finviz Of these, the most concerning is the sale by the President and CEO, Luc Seraphin, who disposed off nearly $5 million in his holdings of the company, in 2024 alone. If the company really were on the brink of a transformative growth trajectory, as the management seems to be implying, the figures would be telling a different story. Overall, while this is concerning, I don't think it refutes my broader thesis of the company, and the long-term potential I believe it holds. Investment Takeaway  Rambus is a semiconductor player well positioned, due to its leadership in the DDR5 market, to soar high amid AI's shift from training to inference. Its strong market position is yielding strong financial results, as seen by its double-digit gains on its topline, operating income, EBITDA, and its strong cash flows. Compared to its peers in the semiconductor industry, the company seems attractively valued. Although the low insider ownership does pinch me a little, I think RMBS is a high potential stock that will see stellar gains in the upcoming years. I rate the stock as a buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479204916"}