Rambus Inc. (RMBS): Worth The Risk?

One-time Wall Street darling and high-flyer Rambus Inc. (NASDAQ:RMBS) is bucking an ugly, bloody tape. The memory-chip make is up more than 4% as we type thanks to an upgrade from Citi.

So you know, Rambus invents, develops, offers and licenses solutions, products and services in security, advanced LED lighting and displays, and immersive mobile media. The Company has four business units: Memory and Interfaces Division, Cryptography Research, Lighting and Display Technologies, and Mobile Technologies Division.

Analyst, Terence Whalen cites three reasons why he now sees Rambus as a "Buy" versus yesterday's "Neutral" rating. Whalen eyes a price target of $12, which is 33% upside potential to target for the tech company.

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Whalen's trifecta of catalysts, in a nutshell:

Solid Management New Business Low expectations i.e. favorable risk versus reward

The Citi analyst explains with more detail, "We see 3 positives driving the stock in 2014: 1) momentum developing for new CEO Ron Black as he transforms RMBS to a 'customer solutions' model from a 'licensing' model, 2) 'blue bird' system on chip (SOC) licensing deals with ASIC/FPGA or analog partners while difficult to predict, these new deals offer potential for '+' revenue revisions with high earnings fall through, and 3) low expectations with the Street's +6% '14 revenue growth undercutting management's 1/5 issued guidance for "low double digit" sales growth."

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Now we know the why, let's see what it would take for RMBS to hit $12 using the company's recent price-to-sales (P/S) and price-to-earnings (P/E) ratios. We'll also peer into the tech company's most recent financial statements for a health checkup.

Whalen's counterparts on Wall Street believe RMBS will earn $0.09 per share on revenue of $287.53 million in 2014. Twelve bucks requires a P/E of 133.33; ewwee, that's some altitude as the five-year high earnings multiple is 123.06.

As for sales, $12 works out to a P/S ratio of 4.7, which is above today's 3.94, but well below the half-decade average of 7.13.

Digging into last quarter's 10-Q, we find some favorable trends within the income statement. Revenue growth accelerated quarter-over-quarter (QoQ) and year-over-year (YoY).

Meanwhile, cost-of-revenue increased at a slower rate than sales while marketing, general and administrative expenses dropped 22.91%. Typically, this is a combination that leads to fatter profit margins and quickening EPS growth.

Overall: Rambus Inc. (NASDAQ:RMBS) probably needs to surprise to the upside for net-income in 2014 to hit Citi's $12 target. However, bullish surprises are high likely with management cleaning up costs and revenue on the rise. Minimally, $10 sometime in 2014 is likely to happen using this year's consensus revenue estimate and today's P/S ratio. In this sense, Terence Whalen is correct in believing RMBS offers an attractive reward-to-risk ratio for investors.