How much would you pay for a Pi?

The good thing about a Raspberry Pi is its versatility. With the right attachments and some tinkering, the bare-bones mini computer can water your plants, solve your Rubik’s Cube, entertain your cat, scare away your birds, animate your Billy Bass, pentest your WiFi network and steal your car.

Shares in Raspberry Pi will be similarly versatile, although it will be harder to know what they make of them. What is the total addressable market if these are the applications? What then is the market?

We ask following the news that Pi could float in London with a valuation of $630 million. Does the price make sense? I do not know. Here are some ways to approach the question:

Since Raspberry Pi’s launch in 2012, the computers have been assembled under license by RS Group, a UK-listed global electronics distributor with a market capitalization of £3.9 billion. RS Group’s licensing agreement with Pi ended in mid-2022 when Pi moved to direct sales. The vast majority of boards are now made at a factory in North Wales owned by Sony, a 1.7 percent shareholder.

For 2023, Pi has announced revenues of $265.8 million, up 41 percent, with EBITDA nearly doubling to $43.5 million. To get a better idea of ​​the moving parts we should use the latest published accounts for 2022 (PDF). It shows that Pi has sold 5 million single-board computers, a 28 percent year-over-year decline, which is due to component shortages.

Pi’s average sales price for a computer in 2022 was $43.10, flat year over year. The loss of RS as a manufacturer hurt gross margin, but a higher share of higher-priced boards in the sales mix helped improve unit gross profit from $4.60 the year before to $6.80 in 2022.

The financial figures for 2022 are as follows:

Besides prioritizing sales to industrial customers when inventories were low, Pi’s 2022 accounts do not break out revenues by end market. The company said this week that business users will account for 70 percent of the total by 2023. What exactly this means will only be known when a prospectus is published.

In December 2022, Pi entered into a new supply agreement with Broadcom, the main chip supplier. Last year’s strong EBITDA growth can easily be explained by operational gearing, as shortages decreased and a backlog of orders was processed.

That effect now seems to be over. Growth from here on out depends on finding new customers and introducing new models, although the average unit sales price of $43 appears to have almost reached the ceiling. Competition from China is stronger at higher prices, teachers won’t appreciate greater complexity, and hobbyist consumers might find that an Arduino or a repurposed smartphone will do the same job for less.

Pi also makes money by selling additional microcontrollers and accessories such as power supplies, both through partners and directly. Neither business unit was particularly profitable in 2022, and it’s been a long time since investors were excited about the potential for reselling computer peripherals.

RS Group estimates the size of its global addressable market at £470 billion, of which single-board computers represent £2 billion. Although RS operates in a much more fragmented and competitive market, and is ten times the size of Pi in terms of revenue, its revenue grew similar to Pi’s last year due to the easing of supply chain tensions. This year, growth will slow down sharply.

The Lex team believes Pi’s growth can continue at its 2023 pace. We’re more conservative on this side of the office. Given last year’s deficits, it’s probably safest to assume that performance can be improved in 2023, but not by much.

Investors in RS have to worry about industrial production cycles and customer inventory levels, which won’t matter much to Pi. On the other hand, RS’s operating margins are in the low teens, while Pi’s appear to be capped in the high single digits. Placing the stock at the same valuation isn’t ideal, but it’s not completely crazy either.

RS shares trade at almost 15 times forward EBITDA. That’s a few turns lower than the long-term average, with the 10x to 25x trading range indicating the cyclical nature of demand. Putting similar ratios on Pi, the $630 million valuation seems about right, albeit with a very wide margin of error.

Since the majority of Raspberry Pi sales are to businesses and many of its installations are for automation, it may be worth comparing Pi to a capital equipment company.

Rotork is a UK listed manufacturer of industrial power control equipment. Like RS, its shares are slightly cheaper than normal at the moment, trading at 15 times Ebitda, so Pi’s proposed valuation of $630 million looks good on that front too.

The British market does not do consumer electronics. There were once set-top box makers – there was Pace, which was bought by Arris in 2015, and Amstrad, which was bought by Sky in 2007 – but they were box assembly companies owned by one or two major customers. Peculiarities of small caps such as Alba and NXT are fortunately forgotten.

Among manufacturers elsewhere, there is Apple and a lot of specialized small-caps. Products made by Casio, Garmin, GM Store Nord, Turtle Beach and Nikon are too similar to single-board computers for a comparison to be useful.

Instead we went with Vizio, an American seller of cheap TVs and soundbars. In February, Vizio agreed to be purchased by Walmart at a valuation of 15 times 2025 adjusted EBITDA.

But Walmart wants Vizio for its smart TV platform. The hardware has only been given a stub value.

Analysts at JPMorgan, which is coordinating Vizio’s 2021 IPO, placed a standalone value on the devices division at 0.5 times forward revenue. That reflects the very low gross margin, as Vizio outsources TV production, although Asian peers with factories such as TCL, Hisense and Sharp are no higher valued.

Valued as a maker of low-cost TVs, Pi is said to be worth about $150 million. However, that doesn’t put any value on the massive open source ecosystem that has grown around Pi over the past decade, so is probably best considered a bear case.

Raspberry Pi’s public ownership structure will make it an interesting case study in fiduciary duties.

Shareholders will want to maximize Pi’s profits by selling products at optimal markups because they are shareholders. But the majority of Pi shares are currently owned by a charity that aims to introduce coding to as many children as possible. The charity plans to remain a shareholder after the IPO.

Maximizing profits goes against the Pi Foundation’s stated goal, which in theory would be best served by giving away computers for free. How will the board serve the interests of all shareholders equally if their wishes are fundamentally incompatible?

Lex has a good overview of the strengths and weaknesses of charities, of which Novo Nordisk is the best known. It is common for these foundations to have broad philanthropic roles, so maximizing product profits is acceptable. The charity embedded in Novo doesn’t just want to make everyone skinny, the Carlsberg non-profit just wants to get everyone drunk. But Pi’s foundation only wants one thing: to make everyone a programmer. The intrinsic asset value of the target is zero.

It’s easy to imagine an overlap in the customer base between Raspberry Pi and Games Workshop. The same kind of people who enjoy painting Warhammer figurines will probably also enjoy coding a real-time train departure board.

But honestly, that’s where the similarities end. Games Workshop has over 500 stores worldwide and Pi has one of them. Games Workshop has multimedia franchises and intellectual properties that build on almost 50 years of knowledge, and Pi does not. Warhammer’s 576,000 active users are regulars, while for most Pi consumers one is probably enough.

What we can say is that they are both good for the dividend. In 2022, Pi paid out $5 million to shareholders (most of which went to charity). Games Workshop’s 2024 dividends totaled £139m. If Pi were to maintain its payout policy and apply the same 4.1 percent dividend yield as Games Workshop, its value would be in the range of $100 million to $200 million.

Raspberry Pi’s products are the opposite of luxury goods, but it does have a great brand. To those in the know, the logo speaks about British innovation, eccentricity and tribalism as much as a Mote-Evolver T-shirt under a G9 Harrington jacket.

What is the intangible value of nerdcore cool? We use Kering, owner of Gucci, as a benchmark. Alessandro Michele, creative director of Gucci between 2002 and 2022, is widely credited with making high fashion nerd chic. Pi has the real deal in spades.

Kering averaged 22 times Ebit during Michele’s tenure. If we place Pi’s 2023 pre-tax earnings of $38.2 million at the same multiple, we arrive at a valuation of $840 million. Spicy!

The point elaborated above is that Raspberry Pi is weird. It has an unusual mix of customers, no publicly traded competitors and an ownership structure with no clear precedent in the public market. It will be unusually difficult to predict sales a few years from now with any confidence. It is a double challenge to give an actual value to these projections.

But of course the valuation work has already been done. A 2021 funding round gave Pi a post-money valuation of $545 million. A follow-up round last November raised the value to $597 million. By hovering at $630 million, Pi can offer his supporters a quick exit with an acceptable profit, after which the management of the meeting becomes someone else’s problem.

A Raspberry Pi is not only versatile, but also attractively cheap. It is not yet clear whether the same will apply to the share.

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