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I like to look for good value in FTSE 250. I find there’s always an interesting company to dig into and test their merits.
Another area that I am currently interested in is the technology sector. Tech has been hot for a while now and this UK mid-cap stock has been no exception.
The company in question Raspberry Pi (LSE: RPI). The low-cost computer maker only listed in the summer but its share price has been skyrocketing.
That got me thinking: is there still value in the current share price?
Business model
On its face, the Raspberry Pi business model is pretty simple. It makes small, low-cost computers that can be used in areas including education, hobby projects, and industrial applications.
I personally bought and tested it before when I was younger and found the whole offering to be really neat.
What started as a small single board computer (SBC) intended for educational purposes has quickly become one of the hottest stocks on the FTSE 250.
I also think having a strong product and market leading position can be a real growth driver for a company going forward.
A case of growth
You might not think that there are many use cases for small computers. Investors seem excited about potential applications in Artificial Intelligence (AI), machine learning, and the Internet of Things (IoT).
A quick internet search shows many videos of people building their own large language models (LLMs) and other AI-related projects using these devices.
If the AI revolution lives up to the hype, I think the Raspberry Pi could grow rapidly. The company and the technology itself have shown flexibility and adaptability to various commercial and industrial applications.
For example, Raspberry Pi computers have been used in weather monitoring and robotics, and even to record data on the International Space Station (ISS).
Measurement
The company only listed in June but Raspberry Pi’s share price has been charging up recently. In fact, shares in the technology company are up 24.5% from the IPO listing price of 280p per share.
Since the company has jumped into the mid-cap index, I thought I would consider the relative current value. Raspberry Pi has a price-to-earnings (P/E) ratio of 27.8 times. That’s about 14 times the average for the broader index.
Some FTSE 250 tech stocks like Softcat they trade in 28.6 lead times. That is arguably the most useful comparison given the significant strength in the respective technology stocks.
However, the high frequency of the Raspberry Pi requires significant future growth and cash flow to justify it.
The decision
I won’t buy a Raspberry Pi right now. I think there are opportunities for growth and expansion in the use of artificial intelligence and wider industrial applications.
However, I am aware of the post-IPO mania in stocks. Taking a naive, long-term view, I think there is too much uncertainty about generating the kind of growth needed to justify a 27.8 times P/E ratio.
It could be the following Nvidiaor AI fever could be a bubble, in which case I think the Raspberry Pi might struggle to justify the current price tag.
For me, this is one that I will revisit after it trades on the stock market for another six to 12 months.
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