2023-11-27 05:19:33 ET
Summary
- RMBS has generated a 20.69% alpha against the S&P since April 2023. We expect it to continue to outperform for the following year.
- The firm printed strong Q3 earnings which is positive for the future.
- The transition to DDR5 and tight inventories in other memory parts are expected to drive price increases and revenue growth for RMBS.
- We reiterate our Buy rating, our projections suggesting a significant upside potential of 20%.
On April 2023 we initiated on Rambus ( RMBS ) with a buy rating. Our thesis was supported first by the A.I. revolution and by the massive shift to DDR5 memory. Since our initiation, the stock has generated a 20.69 % alpha against the S&P.
In this article, we will dive through recent RMBS earnings and explain why at Growth Arcane, we have the conviction that RMBS is set to continue to outperform for the year to come.
Strong Q3 Print: Paving the way for a bright future
In its Q3 2023 earnings, RMBS displayed notable success and resilience in the face of challenges, exceeding expectations on the bottom line with Q3 EPS of $0.93 vs $0.41 for the consensus. Also, the company generated $52 million in cash from operations, higher than expected.
Reflecting the company's commitment to maximize shareholder value, the completion of a $100 million accelerated share repurchases program has been highlighted. The firm strong cash generation leads us to believe that more initiatives of this kind could come.
Several strategic positive drivers that will be crucial for RMBS have also been mentioned.
Indeed, as we expected, demand for memory performance will be driven by generative AI and data-intensive workloads representing crucial long-term growth drivers.
Management is aware of that. In that sense, the CEO mentioned several initiatives such as the recent announcement of HBM3 memory controller IP.
This development could support operations at 9.6 giga transfers per second and will in our opinion position RMBS at the forefront of innovation in the rapidly evolving landscape of high-performance computing.
Memories Inventories: The End of The Tunnel is Near
The DRAM sector faced several challenges resulting in important prices dropping.
These factors were primarily due to supply/demand imbalances driven by inventory depletion and excess production during the COVID surge in demand.
In response to the declining prices, memory suppliers took steps to revise spending plans, reduce production, and curb fab utilization. These actions led to an unprecedented slowdown in memory bit production growth in 2023, significantly lower than the average growth rates seen in previous years.
Inventory levels remain a crucial factor affecting pricing dynamics. As many customers have normalized their memory stockpiles, suppliers have increased their inventories, particularly in DDR4, which could impact the pricing rally.
We also expect the transition to DDR5 and tight inventories in other memory parts (e.g., DDR5, mobile DRAM, and graphics DRAM) is expected to drive price increases.
In this sense, despite ongoing challenges associated with DDR4 inventory corrections, at Growth Arcane, we remain optimistic about the normalization expected in early 2024. In our view, the outlook remains positive, especially for the DDR5 segment.
Time to Position on This Cycle
At Growth Arcane, we believe that investors should consider positioning themselves strategically ahead of the upcoming DDR5 product cycle. Indeed, expecting a rebound, we anticipate a surge in revenue growth for RMBS as the DDR5 market gains momentum within server systems in CY24. This shift to DDR5 is forecasted to generate higher selling prices for RMBS, along with the introduction of new products. While our fiscal year 2023 and beyond revenue estimates already incorporate some impact from the DDR5 cycle, the potential for a DDR5 volume crossover in the first half of fiscal year 2024 could possibly offer a higher potential upside for RMBS especially for the years 2024 and 2025.
Financials and Valuation Update
The iShares Semiconductor ETF ( SOXX ) has well performed on a YTD basis (+48%). However, RMBS outperformed the index by 40.26 printing an 88.39% performance.
Even after this performance, RMBS is not that expensive compared to its peers, that’s why we like this company that trades at a reasonable valuation.
The firm remains rock solid in terms of financial sanity with a very low debt level and a strong liquidity profile.
In terms of cash generation; the firm is also very attractive with one of the best FCF Yields among its peers.
Updating our models, we implemented the last 12M EPS of $2.22 and chose a perpetual growth rate of 2% based on a real growth rate of 2% for the U.S. economy. I expect earnings to grow by 25% for the next 5 years after having taken into account the consensus 200% EPS growth expectation for 2023. We combined this with a WACC that we kept at 9%. With such assumptions, we reach a target price of $81.22 representing a 20% upside potential.
Risks
Many of the risks we mentioned in our previous article remain.
The first one is the recession risks that could lead to an economic slowdown. However, we believe this risk has eased since we wrote our article in April.
We also mentioned higher interest rates that could potentially pressure valuation. Here again, we believe that this risk is behind us and that there is rather an upside regarding this element as rates have now reached a plateau.
The two risks that must be under surveillance are linked to:
The competitive environment remaining strong, especially in such a disruptive industry.
The expiration of patents that must be replaced or renewed.
Conclusion
After updating our models, we expect RMBS to continue to outperform for the upcoming year. RMBS's robust Q3 performance, marked by resilience, strategic initiatives, and financial strength, reaffirms its potential for sustained outperformance.
In our view, the impending DDR5 product cycle presents a strategic opportunity for investors to position themselves advantageously, anticipating RMBS's revenue surge and the company's innovation in the high-performance computing landscape. Despite DRAM sector challenges, the industry's pivot towards DDR5 and other emerging memory segments suggests a forthcoming normalization, particularly favoring RMBS.
Financially, RMBS maintains an attractive valuation against its peers, backed by solid fundamentals, strong cash generation, and a prudent approach to shareholder value maximization.
This name that we particularly like should remain resilient, poised to capitalize on opportunities, drive innovation, and deliver value, thereby maintaining its trajectory of success in the foreseeable future.
For all these reasons we reiterate our Buy rating, our projections suggesting a significant upside potential of 20%.
For further details see:
Rambus: Memory Market Renaissance (Reiterate BUY)