Rambus: DDR5 Momentum Showing Positive Signs (Maintain Buy Rating)

seekingalpha11-06

After our first update, 1 year ago, RMBS underperformed, facing persistent DDR4 inventory challenges despite strong DDR5 Growth.In my opinion, the recent Q3 2024 print represents an inflection point....

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Lari Bat/iStock via Getty Images  Introduction On April 2, 2023, we initiated coverage on Rambus (NASDAQ:RMBS) with a BUY rating, driven by our conviction in its top-tier products, relative discount to peers. Supported by strong AI tailwinds and robust financials, all these elements lead us to consider RMBS as an appealing AI related investment opportunity. Since then, RMBS initially outperformed the Russell 2000 (IWM) by 33.77%. Seeking Alpha However, following our first update, the stock faced a 29.28% decline while the IWM gained 22.52%. In this previous update, we anticipated an end to DDR4 destocking, restored pricing power, and strong DDR5 growth. We were wrong, as the destocking recovery lagged. Seeking Alpha This issue impacted RMBS’s Q4 2023 and Q2 2024 earnings, which showed slower demand and continued inventory challenges. Seeking Alpha, Author After a disappointing Q2 2024, RMBS saw further declines. Now the stock seems to show some stabilization. Encouragingly, after the last positive Q3 print, the stock has rebounded. In this new update, we are going to explain what justified recent poor performance. We will also dive into Q3 earnings print. Then we will analyze the company financials to see if recent difficulties faced by the group deteriorated its strong balance sheet. Then we will finish by updating our models. DDR5 Growth Met Persistent DDR4 Slow Down Inventories are a critical metric for memory producers. When inventory builds up without enough demand, companies may struggle to sell or are forced to discount, limiting their pricing power. In 2021, many chipmakers ramped up production to meet high demand. However, post-pandemic, demand declined amid geopolitical tensions and a challenging macro environment. RMBS has felt the impact, facing several quarters of weak demand and inventory reduction, particularly in the DDR4 segment, even as DDR5 demand remains strong. These issues were highlighted in RMBS's Q3 2023 and Q2 2024 earnings, with two main factors pressuring the stock. In Q3 2023, while DDR5 shipments boosted revenue, DDR4 inventory was still facing difficulties. Concerns grew around DDR4 inventory reduction, which shadowed DDR5’s growth. By Q2 2024, the same challenges persisted. DDR5 shipments continued to rise, but DDR4 inventory reductions lagged expectations. Additionally, RMBS flagged ongoing server market challenges due to a mixed macroeconomic environment, further impacting short-term demand. In the past, these challenges have remained consistent. While DDR5 adoption in AI and data centers is a positive long-term driver, investors are watching RMBS’s inventory trends and margin impact carefully. Q3 2024 Earnings - Strong Print Driven by DDR5 Growth and Solid Cash Generation In our view, this recent print is particularly positive and could represent an inflection point compared to previous quarters. RMBS delivered a strong Q3 performance, driven by solid growth in product sales, especially from DDR5 memory interface chips. While revenue came in just below expectations ($146.8M vs. $147.5M expected), the company beat EPS expectations by 12.5%, posting $0.45 compared to the $0.40 consensus. The memory interface chips segment earned $66 million, marking a 17% growth from Q2 and 27% YoY. Management expects continued growth in this segment for the next quarter and throughout the coming year. Management also mentioned that DDR4 sales only represented $4m. During the quarter, showing a successful transition from DDR4 to DDR5. Consistent with its “cash generator” reputation, RMBS produced $62 million in operating cash flow this quarter and repurchased $50 million in stock. It’s the fifth consecutive quarter of buybacks. Company Presentation Broad Range of Products Fuel By Constant Innovation In its recent earnings call, RMBS management announced disruptive new product launches to answer to strong demand coming from data center and more specifically AI markets. The company introduced advanced chips for DDR5 memory modules, critical for next-gen data centers, with two major products: the RDIMM 8000 and the MRDIMM 12800. RDIMM, or Registered Dual Inline Memory Module, offers speeds of 8,000 mega-transfers per second, ideal for server stability and performance. MRDIMM, a faster, high-demand module reaching 12,800 mega-transfers per second, is designed specifically for AI and data-intensive environments. RMBS has also developed chips to enhance these DDR5 modules, such as the Gen 5 RCD, MRCD, and MDB Chips, which help control data transfer timing for greater speed and reliability. Industry First Complete Chipsets for DDR5 (Videocardz) Additionally, the company launched a new high-bandwidth memory controller (HBM4) for AI and graphics-heavy applications, managing large data volumes essential for AI models. With DDR4 now representing a small portion of inventory, RMBS has shifted focus entirely to the DDR5 market and supporting products. What changes in DDR5 vs DDR4 DRAM? (Rambus) We have the conviction that these recent developments position RMBS ideally to capitalize on the growing demand in data center and AI markets. Financials - Cash Machine Without Any Debt This capacity to invest and to innovate is supported by the firm's strong financials. Seeking Alpha, Author As you can see, the firm's balance sheet is impressive. It holds ample cash, with cash holdings six times higher than its short-term liabilities. Current assets are eight times higher than the firm's current liabilities, highlighting a rock-solid liquidity position. On the long-term side, the firm also maintains a very low debt level, with leverage close to 1 and total liabilities representing less than 17% of total assets. Finally, the firm has a net cash position with a negative net debt of $ -402m. This favorable financial position leaves room for potential investments or future returns to shareholders policy. With stable capital expenditures and strong operating efficiency, the firm has a very high FCF conversion rate, standing above 75% in the recent quarter. Seeking Alpha Valuation Based on management guidance, we expect the firm's top line to grow by mid-double digits over the next five years, which we view as realistic given management's mention of high double-digit top-line growth for the upcoming quarter and year. In our model, we expect cost of revenues, SG&A, and Capex to increase by mid-single digits over the next five years, aligned with the firm’s focus on efficient innovation and cash generation. Assuming the FCF conversion rate remains above 70%, we project the firm’s FCF to grow by an average of 14% over this period. Using a WACC of 9.6% and a 3% terminal growth rate, we reach a target price of $53.79, representing a 10% upside. Seeking Alpha, Author Conclusion We acknowledge that RMBS has faced significant headwinds, characterized by DDR4 inventory challenges and a complex macro environment impacting near-term demand. In our opinion, the company’s strategic pivot toward DDR5 technology, driven by rising AI and data center needs, positions it well on a long-term horizon. Recent products releases demonstrate RMBS focus on innovation and ability to address high-performance market demands. Financially, the company remains particularly resilient, with a strong balance sheet, high cash flow generation, and robust liquidity position, enabling continued investment in growth opportunities and potential shareholder returns.  After updating our models, we decide to maintain our BUY rating, reaffirming our confidence in RMBS positioning in the fast-evolving memory technology landscape.","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":"4.29.2","shortVersion":"4.29.2","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/2481625533"}