Is it time to look again at this fast-growing UK stock?

For two reasons, I think Raspberry Pi (LSE:RPI) is unusual among UK stocks.

First, the mini computer manufacturer operates in the technology sector. It’s well-documented that there’s a short supply of FTSE-listed companies in the industry. That’s why it was particularly welcome to see the group make its stock market debut in June 2024.

Secondly, if analysts are correct, it should grow its earnings significantly over the next two years.

And a rapidly-growing tech stock could be a winning combination. According to JP Morgan, the sector has contributed 32% of global equity returns since 2010.

But T Rowe Price, a famous American investor, once said: “Growth stocks are as varied in their characteristics as a surgeon’s instruments or a carpenter’s tools and, similarly, successful results are dependent on knowledge and experience in their proper use”.

In other words, they’re not all the same. An investor should choose carefully and not simply follow the crowd.

With this in mind, let’s take a closer look at Raspberry Pi.

An uncertain beginning

The timing of the company’s IPO was unfortunate. In the first quarter of 2024, the market recovered from an earlier shortage of semiconductors. But it was then followed by an “industry-wide inventory correction”. Compared to 2023, last year saw a 400,000 drop in unit sales, a 2.4% fall in revenue and a 65% reduction in diluted earnings per share (EPS).

However, it did have over 20 new product launches during the year. And these new core products, accessories and platforms could be why analysts are expecting the financial position to improve significantly.

In 2024, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was $37.2m. The consensus forecast is for this to grow over the next two years to $43m (2025) and $53.5m (2026).

It’s all about the valuation

Those who’ve retained their shareholdings from the beginning have been rewarded with an impressive 188% increase in value.

However, the share price reached an all-time high of 780p in January 2025. Since then, it’s tumbled 33%.

This correction might be due to investors looking to book some post-IPO profit. Or it could reflect concerns that the company’s valuation was starting to look a bit on the high side.

Based on expected earnings for 2025, the stock trades on a forward price-to-earnings (P/E) ratio of 31. This isn’t cheap but is it expensive? I think the answer depends on whether it can grow as anticipated. Higher valuation multiples can be sustained in the tech sector if there’s a compelling growth story.

Some seem to think that Raspberry Pi’s products are for hobbyists. In fact, the majority of its revenue comes from industrial applications. The company reckons there’s an addressable market (personal and commercial combined) worth over $21bn so there’s plenty of scope to increase sales.

Having said that, I don’t think the company’s at the cutting-edge of technology so its valuation does look high to me. For context, the median forward P/E ratio of the ‘Magnificent 7’ is currently 26.8.

I wonder if investors are prepared to pay a premium because a fast-growing UK tech stock is such a rare thing. Personally, I think these people are running ahead of themselves. I’m going to wait and see how the company performs over the next few months before revisiting the investment case.

The post Is it time to look again at this fast-growing UK stock? appeared first on The Motley Fool UK.

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JPMorgan Chase is an advertising partner of Motley Fool Money. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Raspberry Pi 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.