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Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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May 17, 2024

Raspberry Pi – coming to a stockmarket near you?

After some wait, Raspberry Pi has announced that it is considering a float on the LSE.

With a talked of market value of £500m, it was probably not realistic for Raspberry Pi to float in the US.  There would be no room for failure. A slight mishit would leave Raspberry Pi lost forever in the long grass.

As an established business operating in the real world, constrained by reality and selling into industrial applications, Raspberry Pi is not a candidate for runaway US valuation multiples and a multi-billion $ market cap. But it would have been wrong for Eben Upton, Raspberry Pi’s founder and CEO, not to go and have a look.

An ideal candidate for float on a functioning national or regional small-cap market.

Beneath the noise, Raspberry Pi is a UK-based company that in FY23 (Dec y/e) generated revenues of $266m and made profits $37.5m at the operating level.  In the same period, 7.4m of its single board computers and compute modules were sold worldwide. It only began trading in 2012.

Raspberry Pi designs and develops single board computers and compute modules for industrial customers as well as for the hobbyist and educational markets. The industrial market accounts for around 70% of units sold and is the key growth market going forward.

The suggested TAM (Total Addressable Market) of $21bn does not sound fanciful. These are growing markets and it is difficult to see how Raspberry Pi will not grow as a business in the short, medium and even long term. Much of this growth is due to the ability of the semiconductor industry to provide every greater processing power at ever decreasing costs, so it’s important not to confuse unit growth with value growth.

You can throw in a bit of AI into the growth story if you really want to – be that Raspberry Pi powered devices as gatherers or even as interpreters of data (one day).

Analysis is required - real stuff, not post-MiFID fluff

Looking at the numbers, first thoughts are that margins could be higher (FY23 GP 25%, operating profit 14%) but it is a growing business, there should be operating leverage.  But things are not as simple as that, because there have been changes in the product mix, how the devices reach the markets (notably sales of devices made by licensees shifting to sales of Raspberry Pi’s won products), and the almost obligatory supply chain issues.

The muddle extends to the balance sheet, where Raspberry Pi entered the year with a considerable build-up of inventory (FY23 $108m) – and a not insignificant trade creditors figure.

It is probably going to take more than a slide or two to explain this to investors. But those who pay attention will probably have a better understanding of the business and its management than they would if the company had delivered the same 57% growth in gross profits (FY21-FY23) without drama.

It’s not a complicated business but, as with many tech companies, without an eye to the numbers and what is relevant, there are plenty of holes to get lost down.

Opportunities and challenges ahead, but they know what they have to do

The publicly available documentation is relatively quiet on the international aspects of sales.  In FY23 in terms of destination of sales, the UK accounted for 39%, US 17%, Europe 23% and RoW 21%, with the UK seeing the strongest growth.

Sorting out how Raspberry Pi gets products to market and how it can drive revenues harder is something many investors will want to know more about, particularly given its non-commercial, educational and hobbyist heritage.   It now has Martin Hellawell, ex-CEO of Softcat, as Chairman, so it looks like the company is aware of the issue.

Grabbing as much of the value as it can

One could quibble over the capitalisation of development costs, $16.3m in FY23. Basic adjustments suggest that the 14% operating profit margin would be around 8%-9% under US accounting.  However, Raspberry Pi is following the standards, and to quibble would be missing what is behind it. Raspberry Pi is developing more of its own IP, and importantly semiconductor IP; taking it up the value chain and, hopefully, providing a bit of protection against the hazards of the semiconductor and electronics industries as well as improving margins and returns.

It will be interesting to see how this accounting is considered in analyst research and the Raspberry Pi vs US comparisons. I suspect it will be ignored, giving more grist to the mill of those who argue that the UK equity market doesn’t understand tech investing.

This drive to own value across the value chain has seen Raspberry Pi take up a licence from ARM, and it has garnered investment from ARM too. Sony, Raspberry Pi’s manufacturing partner, has also taken a stake. The exact details have not been disclosed, but these things are rarely as simple or as generous as they might first appear.

There is no reason to think that ARM’s magical pixie dust is guaranteed to fall on Raspberry Pi. And it is important to see at the outset that this is not another ARM, much as we might want it to be.

Raspberry Pi is a good business, with a sensible management team that has demonstrated an ability to both grow the business and deal with adversity. It has clear growth potential and is making reasonable returns for its stage of development.  It is not, however, without flaws and risks.

A litmus test for the UK equity market time to put some proper analysis and money where its mouth is

But Raspberry Pi’s significance is far greater than that of a nice, growing company seeking a listing.  It has become the litmus test for the UK equity market.

For too long UK institutional equity investors have failed to invest in technology, all too often hiding behind excuses and (conveniently) conflating risk with lack of understanding or due diligence.

Raspberry Pi’s rumoured valuation is not priced to go, nor is it crazy high. There is a debate to be had. So, for its own sake it would be good to see the UK equity market put some proper analysis and money where its mouth is.

Ian Robertson

+44 7768 276595

 

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