Shares of Rambus (NASDAQ: RMBS) rallied 11.3% on Tuesday as of 12:36 p.m. ET.

Positive news on Rambus came from last night’s third-quarter earnings report, in which Rambus’ bottom line handily surpassed expectations. Management also gave a positive outlook on the current quarter.

AI is leading to surging DRAM demand

Rambus makes revenue in three ways: memory interface chips, which protect and control the flow of data between the memory chip and CPU or GPU in a server; royalty revenue, in which Rambus licenses its patents to other chipmakers; and contract and other, which licenses its physical chip cores, along with service and maintenance fees.

Rambus’ chip prices don’t fluctuate as much as DRAM memory chips do, but its revenue is still highly levered to DRAM demand and the number of server modules sold.

With artificial intelligence (AI) kicking into full gear and traditional servers emerging from their downturns, that demand appears to be strong. Rambus’ revenue surged 38.2% to $145.5 million, with earnings per share (EPS) of $0.45. While EPS was technically down year over year, the prior year’s quarter benefited from a large gain on a divestiture. And while revenue actually slightly missed estimates, the bottom line exceeded expectations by $0.05.

Management also guided for sequential growth, forecasting about $160 million in Q4 revenue, which would be up about 10% sequentially.

In the release, management also noted it was first to market with modules for new advanced DDR5 MRDIMM 12800 and RDIMM 8000 modules, which have the potential to significantly expand the company’s addressable market and growth.

Rambus is well positioned amid the AI revolution

Rambus is an off-the-radar company that doesn’t garner as many headlines as the large-cap chip leaders, but it could be another big AI beneficiary. After today’s surge, shares go for about 25 times current run-rate earnings per share, while the company seems poised for strong growth in the year ahead. In addition, Rambus holds about $433 million in cash and no debt, which is good for about 8% of its market cap, and it’s also repurchasing stock, with $50 million in repurchases last quarter.

With Rambus’ stock still about 30% below its recent highs set earlier this year, it’s definitely an AI name to put on your watch list, even after today’s bounce.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.