Rambus Inc. (RMBS) kick started the New Year on a highly optimistic note. Recently, the company announced that it expects to report fourth-quarter revenue of $83.0 million, well above its previously announced target of $66.0-$71.0 million, spreading cheer among investors. Close on the heels of this announcement, Rambus shares climbed 0.12% in after-hour trade, followed by a 7.4% surge in the day’s trade.
We think that the company’s decision to raise its revenue guidance was based on a multi-year licensing deal win last December. Rambus had signed a 5-year patent licensing agreement with Broadcom Corp. (BRCM) for an undisclosed sum.
Broadcom is a fabless semiconductor company and its operations circle around the broadband, mobile and wireless, as well as infrastructure and networking verticals. According to a report published by the U.S. research firm Gartner in April 2011, Broadcom is now one of the top 10 semiconductor companies in the world.
We believe that the association with Broadcom will support Rambus’ fundamentals in the upcoming quarters. And success at Broadcom could fetch similar deals from the semiconductor industry.
Simultaneously, Rambus released Broadcom from all earlier claims regarding its patented innovations, something that should also serve as a check on legal costs.
The guidance revision is a big positive for Rambus, particularly since it lost a significant anti-trust suit to Micron Technology Inc. (MU) and Hynix Semiconductor Inc. in November. The shares of Rambus had lost significant value subsequent to the defeat as the negative outcome blew investor sentiment.
But the recent share price appreciation indicates a change in investor sentiment. This development notwithstanding, we think that legal battles will continue to overshadow the company’s prospects and could prove difficult for a company of Rambus’ size and resources.
Rambus holds a Zacks Rank #3, implying a short-term Hold recommendation.
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