New AI Chip Launches And Micron Deal Will Strengthen Future Outlook

Key Takeaways

• Diversification and strategic R&D investment position Rambus to capitalize on AI and data center trends, driving future earnings and revenue growth.
  
• Stable licensing revenue, bolstered by agreements like Micron's, enhances Rambus's margin stability and supports long-term shareholder value.
  
• Reliance on new product success, R&D investment pressure, and market risks could challenge Rambus's revenue growth and earnings stability.

Catalysts

Manufactures and sells semiconductor products in the United States, South Korea, Singapore, and internationally.

• Rambus is strategically expanding its product portfolio with new chip introductions, capitalizing on trends in AI and data center growth, which is expected to drive significant revenue growth in 2025 and beyond.
  
• The completion of a long-term patent licensing agreement with Micron through 2029 creates a stable foundation for licensing revenue, potentially improving net margins due to the higher-margin nature of licensing deals.
  
• Rambus is increasing its investments in R&D to accelerate product development, particularly in DDR5 memory interfaces and companion chips, which should support future earnings growth as new products ramp in the second half of 2025.
  
• The demand for high-performance silicon IP solutions, fueled by growth in AI and data-intensive applications, positions Rambus to increase its revenue from licensing and royalty revenues, enhancing revenue and margin stability.
  
• The ongoing share buyback program, with $113 million of stock repurchased in 2024, suggests potential for EPS growth as shares outstanding decrease, enhancing shareholder value in the long term.

Rambus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rambus's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.3% today to 35.4% in 3 years time.
• Analysts expect earnings to reach $324.0 million (and earnings per share of $3.04) by about March 2028, up from $179.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 32.6x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Rambus Future Earnings Per Share Growth

Risks

• There is a reliance on the success of new product rollouts, such as the introduction of companion chips and PMICs, which are still in the early stages of rollout or qualification. Any delays or issues could negatively impact revenue growth.
  
• The company's heavy investment in R&D, aiming to accelerate the product roadmap and address AI demand, could pressure net margins if the returns on these investments do not meet expectations.
  
• Although the demand for DDR5 is currently strong, any market stabilization or increased competition in the future could limit Rambus's ability to sustain its high growth rates, affecting future revenues.
  
• The potential risks associated with the convergence of financials due to ASC 606 and changes in customer behavior or unforeseen contractual changes may lead to revenue recognition challenges, affecting earnings stability.
  
• There is a moderate risk of market fluctuations and technical challenges in collaboration with technology partners, which could lead to setbacks in production and supply chain issues, impacting both revenue and operating expenses.

Valuation

• The analysts have a consensus price target of $73.125 for Rambus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $92.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $914.7 million, earnings will come to $324.0 million, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $54.88, the analyst price target of $73.12 is 25.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.