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Tech stocks - Friday, August 29, 2008

Not Even Rambo Could Save Rambus From Their Problems

Today's gains in the market provided the staff at tech:stocker with some brief comfort but Dell's (DELL:NASDAQ) lackluster earnings report took away any solace we might have been experiencing. It's not that Dell's earnings announcement came as a surprise to us, we haven't liked Dell for quite some time and we'll happily detail the reasons next week. Instead, what makes us nervous is that Dell is seen as a bellwether stock for the tech industry. Back in 2000, we definitely would have looked at Dell for clues about the tech industry. In 2008, we are getting more accurate information on the tech market from Hewlett-Packard (HPQ-NYSE), IBM (IBM:NYSE), and even Apple (AAPL:NASDAQ). But because other investors are still looking at Dell for guidance in the tech industry, we are concerned that some of our favorite tech stocks will be innocent victims of Dell's ineptitude.

Staying with the theme of incompetence, we decided to examine a company in the Silicon Valley that makes Dell look like a victorious warrior, Rambus (RMBS:NASDAQ), a technology licensing company that specializes in the invention and design of high-speed memory architectures.

Our first problem with Rambus is that they are not profitable and from what we can tell, haven't been profitable for quite some time. Sometimes long periods of unprofitability is a subtle sign for the savvy or opportune investor to buy a few shares. In the case of Rambus, lack of profits is a billboard that you would see in Times Square flashing "stay the hell away from Rambus". Why do we feel so strongly?

First, we like to see fiscal responsibility, especially when a company is losing money. Rambus' idea of fiscal responsibility is sponsoring the power play of San Jose Sharks during a Fox Sports broadcast. What's even worse is the fact that they announce this and have links to the broadcast on their Web site. You have to wonder how investors felt seeing the company report a first quarter loss of $0.12 per share while company executives were celebrating the fact that Brian Campbell scored on the Montreal Canadiens to put the game out of reach.

But this is only the beginning of Rambus' seemingly lack of disregard for shareholders.

Today the company announced they donated over 200 laptops to school children in Silicon Valley. Normally we would applaud such a move and might even cut a company some slack as improving the education experience for our nation's youth. After all, Los Altos is fairly close to San Jose and helping out inner city children would be a noble cause. But Rambus didn't donate the 200 laptops to needy kids in San Jose. Instead, Rambus donated 200 laptops to the needy children of the wealthy suburban town of Palo Alto. Even if CEO Harold Hughes was moved by stories at the last PTA meeting about how children were forced to share computers, thus preventing them from reading the latest news on High School Musical.

Could the fiscal irresponsibility get any worse at Rambus? Unfortunately, it does. During the first quarter of 2008, Rambus had $10.5M in stock-based compensation expenses. In the fourth quarter 2007, the company had $16.4M in stock-based compensation. Considering the company is bleeding cash, we have to wonder why anyone is being rewarded with stock.

Normally we don't recommend shorting a company but with Rambus, we are awfully tempted. Only if you are fan of the Los Angeles Clippers, Chicago Cubs, or the Buffalo Bills should you even consider putting a dime behind this company.