Shell Game

You take a trip to the seaside and visit the boardwalk where there's a Ferris wheel, an arcade, some street performers and the fragrance of fried food and sea breeze. It doesn't really matter which seaside or boardwalk - they're the same pretty much everywhere. Rehoboth Beach is where I went when I was younger, so that's what I picture.

Somewhere there will be a table, some cups and some small item - a ball, perhaps. The magician there tells you that all you have to do to win some money is keep track of which cup the ball is under.

You know the ruse: he moves the cups around and in the frenzy you’re supposed to miss that he slips the ball from beneath the cup so that, at the end, the ball isn't under any of the cups.

This isn't a new hustle. Leonardo ran into the same thing on the Ponte di Rialto in Venice during the Renaissance. Probably. And with real shells.

You politely decline. But, here me out, what if everyone else fell for it?

This is, more or less, what happened to a technology licensing company, Rambus, a few years ago.

Sand in the Gears

Back in 2018, the Accounting Wizard Council moved some cups around and, magically, made revenues for Rambus disappear. More than half its royalty revenue went up in smoke. The magicians slipped the revenue ball from under the shell.

The company develops technology used in computing memory interfaces - it makes memory faster. Memory companies use this in their own designs. Customers pay Rambus a license fee that covers a library of patents and Rambus agrees to let them use its solutions.

The partners operate under long-term customer contracts, typically ten years. This is an arrangement, LCM loves.

Because you're astute, you might notice that there isn't an exchange of goods or services after the contract is signed. Just payments made by memory customers to Rambus, some legal documents and a friendly handshake.

In the Before Times, Rambus could just book these cash inflows as revenue with an eye-wateringly high margin. The Accounting Wizardry Council was fine with that for a while. They got bored and began brewing a change in the rules in the mid 2000s.

After more than a decade of back and forth, they decided that in order to record a cash receipt as revenue, there had to be an exchange of goods or services. The ball dropped. Rambus’ revenue vanished. Investors panicked. Share price fell nearly 50%.

…But cash from the contracts kept coming in. The company's value remained intact, it just moved up the magician's sleeve rather than where you could find it under the cup.

Sometimes arbitrary rule changes - like the one made by the Accounting Wizard Council - that don't impact value but do impact appearance spook investors. If investors get spooked enough and stock price falls enough, that presents an opportunity for you, the savvy investor, to ride in and make a sound investment.