Raspberry Pi (LSE: RPI) shares have created a fair bit of excitement since their recent Initial Public Offering (IPO). Investors have been keen to buy the stock, and this has driven its share price up significantly.
I think Raspberry Pi – which designs and develops small single board computers (SBCs) – is a very interesting company. However, I won’t be buying its shares today. Here’s why.
An exciting IPO
When I first did some research into the Raspberry Pi IPO in the week before the event, I came to the conclusion that the shares would most likely do well immediately after listing. There were two main reasons why.
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First, I thought the listing of a tech stock on the London Stock Exchange (LSE) would get investors’ attention. Right now, we’re in the middle of a powerful bull market for tech stocks – driven by the artificial intelligence (AI) theme – and the LSE doesn’t have that much in the way of tech stocks.
Second, the valuation struck me as very reasonable. At the IPO price of 280p, the company’s market-cap was going to be around £540m. Given that total income was $32m last year, that put the price-to-earnings (P/E) ratio in the low 20s. That earnings multiple looked quite attractive to me considering the company’s growth rate in recent years.
| 2021 | 2022 | 2023 | |
| Revenue ($m) | 141 | 188 | 266 |
| Total income ($m) | 15 | 17 | 32 |
In hindsight, I was right about the IPO. Since the event, the shares have shot up. Currently, the tech company’s share price is sitting at 417p. That’s 49% higher than the IPO price.
A high valuation today
And that brings me to why I won’t be buying the shares today. To my mind, the valuation now looks a little stretched.
At the current share price, the company’s market-cap is about £825m. This means the P/E ratio is now above 30. For a company with strong growth and a wide moat, I’d be comfortable with that kind of earnings multiple.
However, my concern about Raspberry Pi is that it doesn’t appear to have a substantial moat. In its registration document, the company said barriers to entry in its markets are relatively low.
It also said its business model and products could be replicated by competitors, particularly if rivals were willing to operate at a temporary loss.
So clearly, this company isn’t an Apple. The US tech giant has consumers locked in because of its amazing ecosystem. This keeps consumers coming back for more, and gives the tech giant an extremely wide moat.
With Raspberry Pi however, it appears to be vulnerable to cheaper products from competitors. I’m not keen to pay a P/E ratio of over 30 for a company that could be undercut.
Better growth stocks to buy?
Of course, if the share price was to pull back and the valuation came down, I might be interested in buying a few shares.
However, for now, I think there are better growth stocks to buy for my portfolio.
