Should You Think About Buying Rambus Inc. (NASDAQ:RMBS) Now?

Rambus Inc. (NASDAQ:RMBS), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the NASDAQGS over the last few months. The recent rally in share prices has nudged the company in the right direction, though it still falls short of its yearly peak. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, could the stock still be trading at a relatively cheap price? Let’s examine Rambus’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for Rambus

What Is Rambus Worth?

According to our price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. In this instance, we’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. We find that Rambus’s ratio of 23.4x is trading in-line with its industry peers’ ratio, which means if you buy Rambus today, you’d be paying a relatively sensible price for it. So, is there another chance to buy low in the future? Given that Rambus’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will Rambus generate?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -5.1% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Rambus. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? RMBS seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on RMBS, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on RMBS for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on RMBS should the price fluctuate below the industry PE ratio.

Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Rambus is showing 3 warning signs in our investment analysis and 2 of those shouldn't be ignored...

If you are no longer interested in Rambus, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.