Raspberry Pi was floated on the London stock market only a few weeks ago, but its market value is already up by more than 40 per cent. The microcomputer maker has been the third most popular investment among customers of AJ Bell, the broker, in the past month. Yet as the excitement surrounding the initial public offering begins to fizzle out, the key question lingers: are the shares still a good price?
Founded in Cambridge in 2012, Raspberry Pi is a designer and developer of low-cost, single-board computers, known in the trade as SBCs. These are used by industrial customers as well as educators and a devoted hobbyist community. Indeed, the “enthusiast and education” market made up 28 per cent of its $266 million revenue last year.
Most of its $66 million gross profit comes from SBCs, at $63.6 million, but it made $4.5 million from accessories such as cameras, keyboards and touchscreen displays. There is a small “other” segment of the group that includes its semiconductors and Raspberry Pi Press, a publishing business that produces Raspberry Pi-related books and magazines.
One of the main draws for investors is that Raspberry Pi is “vertically integrated”. This means it controls key elements in its supply chain. It designs the components in its product, which maximises efficiency and reduces reliance on others.
The company’s growth strategy is simple: increase sales by focusing on unit sales and upping average selling prices. The company innovates quickly, with core SBC product launches every three to four years.
It expects its 2024 financial year to be weighted towards the second half owing to the timing of Raspberry Pi 5, its latest product, last October. Analysts at HSBC expect the group to deliver mid-teen gross profit growth over the next three years.
Last year 82 per cent of its sales went through a “direct distribution channel”, with the company arranging for the manufacture of its products and selling them to a network of approved sellers, who then resell to end customers or to original equipment manufacturers. The remainder goes through a “licensee” channel via its contract with Premier Farnell, the Leeds-based electronics company. It pays Raspberry Pi royalty costs and arranges its own supply of components, manufacturing and distribution.
Only 12 per cent of Raspberry Pi sales come directly from original equipment manufacturers, but a focus on this area should help to drive higher gross profits. While typically it requires greater investment from a working capital perspective (as it requires more money to fund inventory and receivables), the gross profit per unit is three times higher compared with that for the licensee channels and it gives the company further control over its supply chain.
Investors might be drawn in, too, by Raspberry Pi’s asset-light business model. Its customer base is so loyal that it does not need a traditional sales team. It employed 103 people on average last year, with half of those in the engineering department.
Those casting an eye, though, should be aware that less than a third of the company’s shares are in free float and that under half of the business is owned by the Raspberry Pi Foundation, a charity that the company set up in 2008 to help to widen access and to promote computer science among younger people.
The flotation pop has not gone unnoticed. This week it emerged that the asset management branch of JP Morgan had amassed a short position equivalent to 0.51 per cent of the company’s issued share capital.
The stock has cooled off somewhat, down 7 per cent from a peak of £4.40 a few days after it was listed. It still trades at just under 40 times expected earnings for next year but, given the strength of its brand power, robust business model and promising growth prospects, this looks justified.
Advice Buy
Why Strong quality, clear paths for growth and loyal customer base
Scottish American Investment Company
The £911 million Scottish American Investment Company can trace its origins back to 1873 and, not surprisingly therefore, is one of the oldest trusts listed in London. Its global portfolio, which includes the likes of Novo Nordisk, the Danish pharmaceuticals group, and Microsoft, the technology powerhouse, is designed primarily for investors looking for growing income.
The trust has most of its portfolio invested in stocks in sectors that range from technology to consumer goods, as long as the managers deem that each company has a dependable income stream and the potential for profit growth above inflation. The remainder of the portfolio is invested 1.2 per cent in bonds, 0.2 per cent in net liquid assets and 8.9 per cent in property. The latter is managed by OLIM Property Limited.
Since James Dow became lead manager of the fund in August 2017, its total return has been neck-and-neck with the FTSE All World index, although the two have diverged this year, with the trust dropping by 3 per cent, compared with a 13 per cent rise in the global stock market.
The fund now yields 2.8 per cent, compared with an average of 3.5 per cent in its investment trust sector. However, Scottish American does have an impressive track record of 50 years of consecutive dividend rises, increasing its payouts by an average of 4.2 per cent over the past five years, and a total return of more than 180 per cent over the past decade, compared with a 168 per cent rise in the FTSE All World.
The trust reported a charge of 0.58 per cent as of the end of last year, compared with an average of 0.46 per cent among other investment trusts in the global equity income sector. However, the shares trade at a 9 per cent discount to its net asset value, which is decent for a basket of some of the biggest companies in the world. The fund comes with a meaningful allocation to alternative asset classes that differentiates it from most of its peers, as well as diversifying its yield.
Advice Buy
Why Reliable income fund at a discount
