I have a lot of income shares in my portfolio – but I am also always on the lookout for a good growth share to buy.
One of the challenges when buying British shares is that, while there are plenty of income shares to choose from, London has not seen the same level of compelling growth shares in the past decade that are available in stock markets like the US.
So the recent listing of simple computer manufacturer Raspberry Pi has got me thinking. Is this the sort of tech company I would like to buy for my ISA?
Should you invest £1,000 in Frontier Developments Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Frontier Developments Plc made the list?
Strong growth story
The first thing that grabs my attention is that Raspberry Pi really has had the wind in its sails in recent years.
Last year for example, sales jumped and revenue moved up 41% to $266m. Profits grew even faster, surging 85% to $32m.
The recently listed company has a market capitalisation of £817m. That means the current price-to-earnings (P/E) ratio is around 33.
That is higher than I would typically pay for a share, although if earnings growth continues apace then the prospective P/E ratio is lower.
The future looks bright
That sort of growth is impressive to me. But as an investor, I cannot rely on the past as a guide to what may happen in future. Instead, I need to consider the underlying investment case, looking at issues like what might happen to customer demand and how the business can set itself apart from rivals.
I think Raspberry Pi looks strong from this perspective despite its relatively small size compared to industry giants. Its focus on the cheap end of the market and simple products sets it apart from most computer makers.
But thanks to producing proprietary hardware and having a bespoke programming language, there are actually significant barriers to entry helping stop other low-cost makers eat its lunch.
A sizeable existing customer base is an advantage. The company’s ongoing push to find new applications for its product range could broaden the customer appeal further.
I’m tempted to buy
There are risks here. Competing in the lower end of any market means a manufacturer has less flexibility to absorb price increases. So, for example, higher global shipping rates could eat into profit margins.
While the Raspberry Pi brand has its fans, it is unknown to many potential customers and reaching them could mean spending much more on marketing in coming years.
But I think this growth share has real promise. It already has a proven, profitable, growing business in a market I think could expand in future.
As a newly listed firm, however, only limited financial information is available so far. On top of that, the valuation makes me slightly uneasy. I do not think it is a bargain and I fear it could be overpriced if growth rates fall. So, for now, I will be watching without investing.
