How much would you pay for a Pi?

A 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 Rubiks Cube, entertain your cat, repel your birds, animate your Billy Bass, pentest your wifi network and steal your car.

Shares in Raspberry Pi will be similarly versatile, though it’ll be harder to know what make of them. What’s the total addressable market when those are the applications? What even is the market?

We’re asking apropos news that Pi might float in London with a valuation of $630mn. Does the price make sense? Dunno. Here are a few of the ways to approach the question:

• Value Pi like a widget distributor

Since Raspberry Pi’s launch in 2012, its computers were assembled under licence by RS Group, a UK-listed global electronics distributor with a £3.9bn market cap. RS Group’s licence agreement with Pi ended halfway through 2022 as Pi shifted to direct sales. The vast majority of its boards are now made at a factory in North Wales that’s owned by Sony, a 1.7 per cent shareholder.

For 2023, Pi has announced revenue of $265.8mn, up 41 per cent, with ebitda nearly doubling to $43.5mn. To get a better sense of the moving parts we need to use the last published accounts, for 2022 (PDF). Those show Pi sellng 5mn single-board computers, down 28 per cent year on year, which it blamed on component shortages.

Pi’s 2022 average selling price for a computer was $43.10, flattish year on year. Losing RS as a manufacturer dragged on gross margin, but a higher proportion of more expensive boards in the sales mix meant gross profit per unit improved to $6.80 in 2022 from $4.60 the year before.

The headline financials for 2022 look like this:

Beyond noting that sales to industrial customers took priority when supplies were low, Pi’s 2022 accounts don't split revenue by end markets. The company has said this week that, for 2023, business users were 70 per cent of the total. What exactly this means won't be known until there's a prospectus published.

In December 2022, Pi agreed a new supply deal with Broadcom, its most important chip supplier. Strong ebitda growth last year is easily explained by operational gearing as shortages eased and a backlog of orders were dispatched.

That effect now looks to be over. Growth from here depends on finding new customers and introducing new models, though that $43 average selling price per unit looks close to the ceiling. Competition from China is stronger at higher price points, educators won't value greater complexity, and hobbyist consumers might start to find that an Arduino or a repurposed smartphone will do the same job for less.

Pi also makes money by from selling add-on microcontrollers and accessories such as power supplies, through partners as well as direct. Neither business line was especially profitable in 2022, and it’s a long time since investors were excited about the possibilities of reselling computer peripherals.

RS Group puts the size of its global addressable market at £470bn, of which single-board computers account for £2bn. Though RS operates in a much more fragmented and competitive marketplace, and is 10 times the size of Pi by revenue, its sales grew at a similar clip to Pi’s last year thanks to the easing of supply chain stresses. This year’s growth will slow sharply.

The Lex team reckons Pi’s growth can continue at the 2023 pace. On this side of the office we’re more conservative. Given the previous year’s shortages it’s probably safest to assume that 2023 performance can be improved upon, but not by much.

Investors in RS need to worry about the industrial manufacturing cycles and customer inventory levels, which won’t matter as much for Pi. On the other hand, RS’s operating margins are in the low teens while Pi’s look to be capped in the high single figures. Putting the stocks on the same valuation isn't ideal, but it’s not entirely silly either.

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

• Value Pi like an industrial machines maker

Since most of Raspberry Pi’s sales are to businesses, and a lot of its installations are for automation, it could be worth backtesting Pi against a capital goods company.

Rotork is a UK-listed maker of industrial flow control equipment. Like RS its shares are a tad cheaper than usual at the moment, trading at 15 times Ebitda, so Pi’s suggested $630mn valuation looks OK by that measure too.

• Value Pi like a maker of cheap electronics

The UK market doesn’t do consumer electronics. It once had set-top box makers — there was Pace, which was bought in 2015 by Arris, and Amstrad, which was bought in 2007 by Sky — but those were box assembly businesses beholden to one or two big customers. Small-cap oddities like Alba and NXT are, mercifully, forgotten.

Of the manufacturers elsewhere, there’s Apple and a lot of specialist small-caps. Products made by Casio, Garmin, GM Store Nord, Turtle Beach and Nikon are too unlike single-board computers for any comparison to be useful.

We’ve gone instead for Vizio, a US seller of cheap TVs and soundbars. In February, Vizio agreed to be bought by Walmart at a valuation of 15 times 2025 adjusted ebitda.

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

Analysts at JPMorgan, a coordinator of Vizio’s 2021 IPO, put a standalone value on the devices division of 0.5 times forward revenue. That reflects very low gross margin, since Vizio outsources TV manufacturing, though Asian peers with factories such as TCL, Hisense and Sharp are no more highly rated.

Valued like a maker of cheap TVs, Pi would be worth $150mn or thereabouts. That puts no the value on the huge open-source ecosystem that has grown around Pi over the past decade though, so is probably best considered to be the bear case.

• Value Pi like a charity

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

Shareholders will want to maximise Pi’s profit by selling products at an optimal mark-up, because they’re shareholders. But a majority of Pi shares are held currently by a charity whose aim is to introduce as many kids as possible to programming. The charity intends to remain a shareholder after the IPO.

Maximising profit runs counter to the Pi Foundation’s stated objective, which in theory would be best served by giving away computers for free. How will the board serve the best interests of all shareholders equally when their wants are fundamentally incompatible?

Lex has a good summary of the strengths and limitations of corporate charitable foundations, of which Novo Nordisk is the most famous. It’s normal for these foundations to have broad philanthropic remits, so maximising product profit is acceptable. The charity embedded in Novo doesn’t just want to make everyone thin any more Carlsberg’s non-profit just wants to get everyone drunk. But Pi’s foundation wants one thing only, to make everyone a coder. The intrinsic equity value of its objective is zero.

• Value Pi like a tabletop games manufacturer

It’s easy to imagine some customer base overlap between Raspberry Pi and Games Workshop. The same sorts of people who like painting Warhammer figurines will probably also enjoy coding a real-time train departures board.

Honestly, though, that’s where the similarities end. Games Workshop has more than 500 stores worldwide and Pi has one. Games Workshop has multimedia franchises and intellectual property assets that draw on nearly 50 years of lore and Pi does not. Warhammer’s 576,000 active users are repeat customers, whereas for most Pi consumers one is probably enough.

What we can say is that they’re both good for dividends. In 2022 Pi, paid out $5mn to shareholders (most of which went to its charity). Games Workshop’s 2024 dividends totalled £139mn. If Pi kept the payout policy in place and commanded the same 4.1 per cent dividend yield as Games Workshop, it would be valued in the order of $100mn to $200mn.

• Value Pi like a luxury goods maker

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 of British innovation, eccentricity and tribalism as much as a Mote-Evolver T-shirt under a G9 Harrington jacket.

What’s the intangible value of nerdcore cool? We’ll use Kering, owner of Gucci, as a benchmark. Alessandro Michele, Gucci’s creative director between 2002 and 2022, has been widely credited with making high fashion out of geek chic. Pi has the real thing in spades.

Kering averaged 22 times Ebit during Michele’s tenure. Putting Pi’s 2023 profit before tax of $38.2mn on the same multiple gives us a valuation of $840mn. Punchy!

• Value Pi like it’s still privately owned

The point being laboured above is that Raspberry Pi is weird. It has an unusual mix of customers, no listed peers, and an ownership structure with no obvious public market precedent. It’s going to be unusually difficult to forecast sales a few years out with any confidence. Putting a current value on those projections is doubly challenging.

But of course, valuation work is already done. A funding round in 2021 gave Pi a post-money value of $545mn. A follow-on round last November raised the value to $597mn. By floating at $630mn, Pi can offer its backers a quick exit with an acceptable profit, after which meeting guidance becomes someone else’s problem.

As well as being versatile, a Raspberry Pi is attractively cheap. It’s not yet obvious whether the same will be true of the stock.