2023-09-08 07:45:13 ET
Summary
- Rambus is strategically positioned to benefit from the growing demand for high-performance memory solutions in the AI and data center sectors.
- Despite a recent slowdown in revenue growth, Rambus is actively repurchasing shares, which may be a bold move considering the current market dynamics and uncertainties.
- The company's focus on cash flow generation and its pivot toward controller solutions and security IP for data centers and AI systems make Rambus an intriguing player in the semiconductor.
Investment Thesis
Rambus ( RMBS ) positions itself as a significant player in harnessing AI's potential within the semiconductor industry.
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.
Rambus' Near-Term Prospects
Rambus is a leading provider of semiconductor chips and silicon intellectual property aimed at accelerating data processing. Rambus specializes in high-performance memory subsystems, offering a range of chips and IPs that enhance the performance and security of data-intensive systems.
As data usage continues to surge due to factors like cloud computing and artificial intelligence, Rambus plays a crucial role in ensuring fast and secure data connections within and across various hardware systems.
As you'd imagine, given the hype around AI, Rambus is seeking to capitalize on this rapidly growing market. As AI technologies like generative AI continue to grow and require high-performance data processing, there's a surge in demand for more memory bandwidth and storage capacity in data centers.
AI systems need servers with massive memory, and this trend benefits Rambus as it manufactures memory solutions to satisfy this AI appetite.
Additionally, Rambus recently made a strategic move by selling its PHY IP business while keeping its digital IP business. This decision allows them to double down further into developing controller solutions and security IPs that are crucial for data centers and AI.
Hence, Rambus has pivoted its business to service what the AI market craves most - fast and secure data handling. Leaving Rambus nicely placed as a key player, providing chips that power AI systems.
Next, we'll move beyond its narrative and focus on its financials.
Revenue Growth Rates Have Slowed Down
Anyone following the memory sector will be acutely aware that there appears to be a mismatch between where chip firms communicate their vision for the growing need for data center memory to provide for ever-demanding workloads and their underlying fundamentals. This dynamic is well reflected above.
For what is supposed to be a secular growth story, it appears that Rambus' growth rates are pointing in the wrong direction.
For their part, Rambus believes that this is just a temporary cyclical correction and as such, Rambus is looking to use this opportunity to repurchase its shares, something that we'll discuss in the next section.
Capital Returns? Now?
Rambus is making substantial cash flows. Consequently, Rambus believes that its near-term best use of excess cash flows is to repurchase shares .
Accordingly, Rambus is in the process of repurchasing approximately 1.6 million shares at around $62.50 per share. Yes, the share price today is slightly lower than this purchase price. But the company has opted to repurchase its shares rapidly and, as such, it has had to compromise on being price-sensitive.
Personally, I'm not a fan of companies that seek to "rapidly" repurchase. Indeed, in my experience, the vast majority of management teams end up repurchasing shares in their companies at the wrong times.
Nevertheless, this amounts to slightly more than 1% of its shares being reduced.
On yet the other hand, as you can see above, Rambus' multiple right now is towards the highest point in the past 2 years. Is this truly the best time to start repurchasing its shares?
Again, this very much depends on how much one believes that Rambus' slowdown is just a temporary bleep.
For my part, as I follow many companies, I firmly buy into the idea that generative AI will be a massive game changer that will lead to medium-term increased demand for memory. Even if at present, there's still some uncertainty overhanging this sector.
The Bottom Line
Rambus has a strong focus on cash flow generation. For me, that's always a winner.
As the demand for memory bandwidth and capacity intensifies, driven by the growth of AI and data-intensive workloads, Rambus is strategically poised to cater to these needs.
While Rambus has experienced a recent slowdown in revenue growth rates, the company views it as a temporary cyclical correction and is taking steps to repurchase shares at what it considers an opportune moment.
However, I question the timing of these buybacks, especially as the share price is near its recent highs. The company's outlook hinges on the belief that generative AI will drive increased memory demand in the medium term, but some uncertainty still looms over the sector. Despite these considerations, Rambus stands as a compelling player in the AI-driven semiconductor landscape.
For further details see:
Rambus: Positioned For AI Strength In Semiconductors