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The UK market is often seen as falling short when it comes to technology. However, while it may not have tech names to rival those in the US or even in Europe there are some notable exceptions.
After a mixed start to life as a public company following its high-profile IPO, Raspberry Pi will have shot to the top of investors’ consciousness after its position as a beneficiary of the artificial intelligence boom became clearer earlier this year and following its recent set of first-half results.
Its shares enjoyed double-digit gains on the day the numbers were released (24 September) as investors reacted with massive enthusiasm to the financial performance. The question now is whether this is as good as it gets for the business or if it has the capacity to build on its recent success.
What is Raspberry Pi?
Headquartered in Cambridge, Raspberry Pi is a designer of high-power, low-cost single-board computers, compute modules and semiconductors.
It was founded in 2012 by current CEO Eben Upton based on work he did at Cambridge University, starting in the mid-noughties. The charitable Raspberry Pi Foundation remains the single largest shareholder.
Raspberry Pi has moved beyond a world of hobbyists and educators looking for cheap computing tools and is now seeing growing use by industrial customers and other businesses, particularly in AI applications which run directly on devices rather than through data centres.
This so-called ‘edge AI’, which operates locally without an internet connection, brings benefits around data and privacy and cost while also having the capacity to improve reliability.
Raspberry Pi’s kit can be built into items such as factory automation units and autonomous drones, and the company also designs computer accessories and software to ensure the reliable operation and longevity of its products.
How does it get its products to market?
Raspberry Pi designs its own products in partnership with Broadcom and Arm, another Cambridge based technology business which has a 13.1% stake in its smaller counterpart after recently upping its holding. Raspberry Pi then works with third-party manufacturers before selling the finished products directly to its global customer base.
Under licensing deals, it also provides intellectual property to Premier Farnell and supplies the related components. Direct sales either to original equipment manufacturers or authorised resellers account for upwards of 70% of units which go out of the door.
Taiwan Semiconductor Manufacturing Company fabricates most of the semiconductors used by Raspberry Pi. Because Raspberry Pi’s wafer throughput is below the threshold needed for a direct relationship with TSMC, production is arranged through aggregator IMEC. Assembly is outsourced to third-party contract electronics manufacturers, principally Sony.
Around 90% of Raspberry Pi’s SBCs (single board computers) and most of its compute modules are produced at Sony’s facility in Wales, while a smaller range of products are made at its manufacturing site in Japan.
Raspberry Pi has limited long-term contracts with customers, who typically make purchases as and when they need. This does mean that customers have the benefits of flexibility and availability of products without the need for long-term contracts. It does, however, result in limited visibility for Raspberry Pi itself over future orders.
What about recent results?
The company’s record-breaking first-half results saw revenue surge 90% and profit more than treble as some forward planning in procurement paid off in spades for the business.
Raspberry Pi had built up a significant inventory of memory chips which not only helped protect it from the big price increases for these components in recent months but also insulated it from supply shortages in this area. This meant it could grab market share from competitors who weren’t as well prepared.
This supportive trend is now anticipated to unwind as Raspberry Pi has worked through its lower-cost inventory and Berenberg analyst Jon Byrne says he expects “a more challenging few years due to those higher memory prices and potential supply chain challenges affecting cash flow and profitability going forward”.
Rising input costs are likely to begin having an impact in the second half of the current financial year. Nonetheless the company still upgraded full-year earnings guidance at the half-year stage and is reinforcing its supply chain to help it fulfil future demand.
How does this mixed outlook tally with the company’s current valuation? Based on consensus forecasts the shares trade on a 2027 price to earnings ratio of 46.6 times. The company doesn’t pay a dividend as it uses cash flow to invest for future growth, it has limited net debt.
Focusing on long-term potential and key person risk
Assessing Raspberry Pi may well involve taking a view on the company’s ability to tap into long-term opportunities around semiconductors and further product innovation rather than the trajectory of short-term earnings.
The growth strategy has three main strands:
- Grow established and new customers through its authorised reseller network;.
- Engage and win design-in kit directly with industrial companies;
- Work towards strategic partnerships to accelerate market reach.
In that context, investors may be wary of key person risk given how central Upton has been to the development and direction of the business.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...