Rambus Inc is Officially a Small-Cap Stock

Who would have guessed? The technology giant recently lost an antitrust lawsuit, in which it accused Micron Technologies MU and Hynix of colluding with each other to fix memory chip prices. Rambus accused the companies of collusion to dissuade consumer from purchasing Rambus' products. While Rambus stood to win over $1 billion if the jury voted in its favor, it lost the trial.

The stock market was clearly displeased with the stock, as high activity caused the stock to halt. After the halt ended, the stock proceeded to drop almost 75%, ultimately closing down 60% for the day. Based on the verdict, it is clear that the jury as well as traders believe that Rambus' shortcomings are a result of one thing only: a lack of quality.

Interestingly, Rambus has filed suit against competitors since its inception in 1990. In fact, it filed a lawsuit against Samsung, ultimately settling for about $900 million. In any event, this particular lawsuit appears to have disgruntled investors to the point that it has gained the dreaded small-cap status.

What can Rambus do now? The company could direct its focus in one of two directions. It could either ramp up in-house research and development expenses. However, it appears to have taken this approach since 2009. For example, R&D totaled to $67 million in 2009, $93 million in 2010, and $105 in the trailing twelve months.

Rambus may also consider purchasing other companies' intellectual property, whether it outright purchases them or signs licensing agreements. This may be an interesting avenue for the tech company, although it appears to have been increasingly going this route. In 2009, it spent $3 million on intangible assets, which in this case is IP assets, and spent $8 million in 2010. It definitely appears the numbers are insignificant compared to in-house R&D expenses, so Rambus may want to consider pushing forward with this strategy for the future.

In various notes by equity research analysts and other critics, Rambus' product quality has repeatedly come under fire. If the company believes in its products and considers these outside claims to be facetious, it may consider increasing its marketing budget. In corporate finance, wheeling and dealing is the way to get things done. Rambus may want to do the same thing to get more deals and generate more revenue, without boosting expenses on R&D and asset purchases.

No one knows what Rambus will do going into the future. The one thing we do though is that the company's management is scrambling to figure out how to appease investors. Management will definitely want to prevent a situation comparable to Dendreon's DNDN stock price, which dropped over 75% after releasing poor FDA trial data and has yet to recover. Whatever it decides to do, it will have to revamp its public image and provide products that its consumer demographic will buy.

ACTION ITEMS:

Bullish View:
Traders who believe that Rambus is an appropriate long investment might want to consider the following trades:

• Traders may have overreacted to the legal news: Rambus did not really lose any money, they simply lost on allegations against other companies.

• Rambus' revenues have increased steadily over the last several years, indicating increased consumer confidence in its products.

• It has room to improve its operations if it turns out that its current product suite is not up to par.

Bearish:
Traders who believe that Rambus is more suited for a short play may consider an alternate position:

• The loss in court signifies that factors like poor marketing and poor product quality are causes for its financial problems.

• Multiple equity research analysts released negative notes about Rambus following the court ruling, citing Rambus itself for being the cause of its problems.

• Rambus' quarterly releases in 2011 points to a devastating performance compared to 2010 numbers.

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