What: Shares of Rambus fell as much as 26% on Tuesday, following the technology licensing vendor's release of third-quarter results.
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So what: The report itself was a fairly mild disappointment. Sales rose 6% year over year to $73.8 million, falling short of Wall Street's $76.2 million consensus target. On the bottom line, adjusted earnings rose 8% to $0.14 per share, just a penny below the analyst view. By themselves, these results might have resulted in a moderate share price drop but hardly a 25% rout.
But Rambus followed up with fourth-quarter revenue guidance of approximately $74 million, once again far below the Street's $83.5 million consensus. And even this weak forecast comes with a big caveat: "Achieving revenue in this range will require that the Company sign new customer agreements for patent and solutions licensing among other matters," said the company.
These future achievements are far from guaranteed, and Rambus may very well miss its own meek revenue target in the fourth quarter.
Now what: And if that weren't enough, Rambus also took this opportunity to announce a large-scale headcount reduction. The company's payroll will shrink by 8% over the next two quarters, yielding annual cost savings of roughly $10 million.
Furthermore, CEO Ronald Black took time out in the earnings call to cover a couple of serious business setbacks. "One of the larger, more complex licensing and broad partnership agreements we were negotiating in our security business has stalled, and at this point we are unlikely to see it close," Black said. Furthermore, technical issues with a new memory technology led to missing the product qualification window for another large customer.
On the upside, Rambus recently signed a royalty-bearing license agreement with IBM , covering the rights to use Rambus' high-speed memory and serial data link technologies.
As of Monday night, Rambus shares had climbed 36% higher over the previous 52 weeks. After Tuesday's drastic plunge, the stock is trading slightly down year over year and 34% below the 52-week highs it reached in June. The stock could still fall much lower, as it floats atop a P/E ratio of 41 times trailing earnings. The forward P/E ratio is a much more affordable 15 times current estimates, but we'll see how long that lasts when analysts start adjusting their earnings targets based on the new Rambus guidance.
With or without the IBM deal, Rambus still strikes me as one of the riskiest stocks on the market. Personally, I wouldn't touch this ticker with a 10-foot memory stick.
The article Why Rambus Inc. Fell More Than 25% Tuesday originally appeared on Fool.com.
Anders Bylund owns shares of International Business Machines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.