I love looking for good value in the FTSE 250. I find there is always an interesting company to dig into and assess on its merits.
One area I am intrigued by at the moment 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 is Raspberry Pi (LSE: RPI). The low-cost computer maker only listed in the summer but its share price has been going gangbusters.
That got me thinking: is there still value at the current share price?
Business model
On the face of it, Raspberry Pi’s business model is quite simple. It makes small, low-cost computers that can be applied to areas including education, hobby projects, and industrial applications.
I’ve personally bought and experimented with one before when I was younger and find the whole offering really neat.
What started out as a small single-board computer (SBC) intended for educational purposes has quickly become one of the hottest stocks in the FTSE 250.
I also think having a strong brand and market-leading position could be a real growth driver for the company moving forward.
Case for growth
You might not think that there are a lot of use cases for tiny computers. Investors appear excited about the potential use case in artificial intelligence (AI), machine learning, and the Internet of Things (IoT).
A quick internet search shows numerous 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, then I think Raspberry Pi can grow rapidly. The company and technology itself has shown flexibility and adaptability in a variety of commercial and industrial applications.
For instance, Raspberry Pi computers have been used in weather monitoring and robotics, and even recording data on the International Space Station (ISS).
Valuation
The company only listed in June but the Raspberry Pi share price has been on the charge lately. In fact, shares in the tech company are up 24.5% from the IPO listing price of 280p per share.
Since the company leapt into the mid-cap index, I thought I’d consider the current relative valuation. Raspberry Pi has a price-to-earnings (P/E) ratio of 27.8 times. That is nearly double the 14 times average for the broader index.
Other FTSE 250 tech stocks like Softcat are trading at 28.6 times earnings. That is arguably a more useful comparison given the significant potential in the right tech stocks.
Even so, Raspberry Pi’s lofty multiple requires some serious future growth and cash flow to justify it.
The verdict
I won’t be buying Raspberry Pi right now. I think there is certainly scope for growth and increasing usage in artificial intelligence and broader industrial applications.
However, I am wary of the post-IPO mania in the stock. If I’m taking a Foolish, long-term perspective, I think there is too much uncertainty around generating the kind of growth required to justify a 27.8 times P/E ratio.
It could become the next Nvidia, or the AI fever could be a bubble, in which case I think Raspberry Pi may struggle to justify the current share price.
For me, this is one I’ll revisit after it’s been trading on the stock market for another six to 12 months.
The post Trading at 28 times earnings, is there value in this FTSE 250 stock? appeared first on The Motley Fool UK.
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Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Softcat Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
