Sometimes stocks are expensive, and sometimes they are ridiculously expensive.
In a recent client training session, we did the work to quantify just how expensive Rambus’ (RMBS) stock is at $61/share. We use our best-in-the-world reverse discounted cash flow (DCF) model to apply expectations investing and analyze the future cash flow expectations baked into the stock.
What we found might shock you.
We’ve Seen this Movie Before
The problem with popular stocks is that they can stay so expensive for so long that investors just assume the stock deserves its valuation.
We caution investors against falling into this trap, and we wrote this report to show you just how dangerous and terrible the trap is.
The Honest Narrative on RMBS
As we do for all of our Reverse DCF Case Studies, we use our models to quantify the future performance of the company required to justify the stock price.
Specifically, our model shows that to justify ~$61/share, Quantum Computing would have to:
- grow revenue at 12% compounded annually for 30 years while also
- improving its return on invested capital (ROIC) from 19% to ~260%, or higher than Google (GOOGL), Meta (META), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) or Amazon (AMZN).
I think it is fair to say that this stock has shockingly high expectations for future cash flows embedded in its stocks price. Keep in mind, we are not saying the company will not meet these expectations. We are telling investors what hurdles the company must clear for the stock to be fairly valued at its current price.
To be clear, an investor would have to believe that the company’s future performance would be significantly better than what’s baked into the current price to believe there was material upside in the stock.
More Honest Narratives
With our DCF model, it’s easy and only takes a few seconds to quantify the impact of anything that affects future revenues, margins, and cash flows.
If you’re interested in seeing more examples of how our DCF model works, I recommend checking out the Reverse DCF Case Studies here in our Online Community. To join our Online Community, complete this form.
Our community is free to join as is access to the Reverse DCF case studies.
How To Avoid the Landmines
Whenever stocks get that expensive, it is only a matter of time before they fall back to earth as the law of competition inevitably proves the expectations for future cash flows to be overly optimistic.
We have multiple Model Portfolios, including our Zombie Stocks list, to warn investors of stocks to avoid and alert them to stocks that get our Attractive rating. We also provide best-in-class ratings for stocks, ETFs, and mutual funds.
We hope you enjoy this research. Feel free to share with friends and colleagues!
This article was originally published on January 31, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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