This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Rambus wrecked
Alas, poor Rambus (NAS: RMBS) , we knew it well. A little over a month ago, fellow Fool Anders Bylund laid out the case for selling Rambus when the company lost yet another litigation battle, this time before the International Trade Commission. Less than a week ago, Rambus proved us right when its quarterly earnings report came up short of expectations.

That's actually the nice way of putting it. Even after signing a patent licensing agreement with NVIDIA (NAS: NVDA) , Rambus' Q1 loss was more than six times as big as the loss it posted a year ago, while revenues were basically flat. The company still hopes to reverse its slide by appealing court losses to companies such as Micron, Hynix, LSI, and STMicroelectronics. But as the saying goes, the wheels of justice turn slowly -- if justice is even on Rambus' side -- and investors are starting to lose patience.


In evidence of which, BWS Financial announced that it was removing its buy rating from the stock yesterday:

RMBS continues to find ways to disappoint investors. Even though new licensees have been signed, the Company has not been able to generate an increase in revenue. ... [The] Company tries to gain acceptance with other patents in the portfolio [but] it could take a longer period of time than we had first anticipated for RMBS's stock to regain lost ground.

But is BWS jumping the gun? Might it make sense to stick around perhaps just a bit longer and see whether Rambus can pull a rabbit out of its hat?

Depends on how much cash the rabbit brings with it
It depends. Absent a court-granted windfall, Rambus doesn't look like a terribly profitable company in its own right. There's the quarterly loss Rambus just reported, for one thing, and the fact that GAAP "profits" at this company have run negative in four of the past five years for another.

True, the picture looks a little better from a "cash profits" perspective. Rambus generated $34 million in positive free cash flow last year, and it's averaged close to that number ($29 million) annually over the past five years.

Worst case, therefore, I'd say Rambus is a $400 million enterprise selling for about 14 times annual cash production.

Foolish takeaway
That's not an unreasonable price if Rambus can generate decent, mid-teens growth going forward. The problem is that Wall Street estimates that the most we can expect out of Rambus over the next five years is about 10% annual growth -- and remember that in three of the past four quarters, Wall Street vastly overestimated the amount of profits Rambus would produce, so that "10%" number may be an optimistic assumption.

Long story short, I'd rather be short this company than long.

At the time this article was published But for now, Rich isn't either. In fact, while Fool contributor Rich Smithowns a few shares of NVIDIA, hedoesn't short shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 349 out of more than 180,000 members. The Motley Fool has adisclosure policy.Motley Fool newsletter serviceshave recommended buying shares of and writing puts on NVIDIA. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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