On Tuesday (11 June), the Raspberry Pi (LSE:RPI) share price leapt 42% after the low-cost computer manufacturer made its stock market debut and conditional trading commenced.
By the end of the week, when all trading restrictions had been removed, the company’s shares were changing hands for 427p — a 53% increase compared to its offer price of 280p.
Over-subscribed
The company’s IPO (initial public offering) was so popular that investors were restricted to 365 shares each. It appears to me that this unmet demand is the principal reason why the share price has been driven higher.
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The float is also a good news story for the London Stock Exchange, which has seemingly struggled to attract high-quality tech companies in recent years.
In my opinion, Raspberry Pi’s success is partly due to the fact that its computers are not mainstream.
However, it’s a popular misconception that its products are primarily used to learn coding, control home devices, and play retro games. Although significant, the enthusiast and education market only accounted for 28% of unit sales in 2023.
The company’s biggest market is the industrial and embedded sector, to which it sold 72% of its computers in 2023. Varied applications include electric vehicle charging, digital signage, and sports performance tracking.
Across both markets the company claims to have shifted 60m units since 2012.
Other positives
Raspberry Pi looks like a quality company to me. And it’s growing rapidly.
During FY23, revenue increased by 41% to $265.8m, compared to FY22 ($187.9m). And earnings increased by 85% to $31.6m (FY22: $17.1m).
The company has a strong balance sheet with no debt. At the end of 2023, it had $42.2m in the bank.
It can also boast of a blue-chip shareholder base with ARM Holdings and Sony both having a stake in the business.
Market cap
But the company now has a stock market valuation of £826m.
This means its stock trades on 33.4 times its earnings for the year ended 31 December 2023 (FY23).
This sounds expensive. Although if the company is able to grow its profits in FY24, its price-to-earnings (P/E) ratio will fall.
However, the best way to assess whether a stock offers value for money is to compare it to others in the same industry.
Of the competitors identified by the company, only three are listed. I’ve taken a look at their most recent annual accounts and calculated their historic P/E ratios — Adlink Technology (48.3), Advantech (28.3), and Rockwell Automation (21.5).
The average of these (32.7) suggests that Raspberry Pi’s shares are overvalued by approximately 2%. Although, if it could achieve a similar valuation to Adlink, the company’s stock appears 45% undervalued.
My verdict
Life as a listed company is very different to being privately owned. I’ve seen before how investors can sometimes get carried away with ‘toppy’ valuations.
The case of Dr. Martens springs to mind. At IPO, its shares were valued at 370p and they quickly went over 500p. After five profits warnings in just over three years, they are now changing hands for approximately 81p.
Therefore, despite being a big fan of Raspberry Pi, I don’t want to buy any of its stock at the moment. I’m going to take another look when the hype surrounding the IPO has died down.
