Accelerated Hardware Obsolescence And Rising Costs Will Undercut Value

Key Takeaways

• Razor-thin margins and earnings growth are threatened by hardware commoditization, intense competition, and accelerating product cycles driving up R&D costs.
  
• Exposure to economic cycles, rising trade barriers, and lack of software ecosystem differentiation limits resilience and makes sustained revenue expansion uncertain.
  
• Rapid innovation, deeper industrial OEM focus, vertical integration, recurring software revenues, and expanding global reach all position the company for sustained margin and earnings growth.

Catalysts

Designs and develops single-board computers, compute module, and semiconductors in the United Kingdom, Europe, the United States, Asia Pacific, and internationally.

• Despite ongoing product launches and a refreshed technology roadmap, Raspberry Pi Holdings faces growing risk from rapid hardware commoditization, with increased competition from low-cost Asian manufacturers threatening sustained pricing power and leading to possible gross margin erosion in the coming years.
  
• The general shift in technology toward ever-faster innovation and shortened product lifecycles could accelerate obsolescence for Raspberry Pi's core single-board computers, forcing the company into higher and costlier R&D investment cycles, compressing net margins over time.
  
• Heavy reliance on industrial and embedded segments exposes the company to global economic downturns; any contraction in capital spending or prolonged inventory destocking cycles from OEM customers may result in inconsistent or declining revenue growth well beyond fiscal 2025.
  
• Rising trade barriers, geopolitical friction, and new environmental compliance requirements risk increasing production costs for the company's UK-based manufacturing, reducing global market reach and potentially lowering overall operating profit as export conditions worsen.
  
• While the company is moving to monetize software and expand recurring services, its ecosystem is still fundamentally hardware-centric and lacks meaningful software differentiation relative to platform giants, making long-term earnings growth projections overly optimistic in the face of big tech competition and market consolidation.

Raspberry Pi Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Raspberry Pi Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Raspberry Pi Holdings's revenue will grow by 18.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $32.8 million (and earnings per share of $0.17) by about July 2028, up from $11.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 44.3x on those 2028 earnings, down from 99.3x today. This future PE is lower than the current PE for the GB Tech industry at 66.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Raspberry Pi Holdings Future Earnings Per Share Growth

Risks

• The rapid pace of product innovation and frequent successful launches, such as the 22 new products in the second half of 2024 including high-demand platforms like Pi 5 and RP2350, suggests the company is capable of driving both user and OEM engagement, which may support accelerating revenue and margin expansion over time.
  
• Significant expansion into the industrial and embedded OEM market, now the majority of the business, increases exposure to longer-term contracts and higher-margin commercial sales, which can considerably improve net margin and more stable earnings relative to the more volatile enthusiast/education segment.
  
• Raspberry Pi's growing IP moat through vertical integration-designing its own silicon-has led to higher-margin products (as shown with Pico boards), enabling greater control over cost structure, pricing power, and sustained gross profit per unit, directly supporting long-term profitability.
  
• The launch and monetization of new software offerings such as Raspberry Pi Connect, alongside a developing cloud and services ecosystem for OEM customers, opens recurring revenue streams and increases average revenue per user, which has the potential to lift net income over time.
  
• The company is strengthening its global distribution network, adding new territories and deepening reseller and OEM partnerships, all amid normalized inventory and growing post-pandemic demand, setting up resilient multi-year revenue growth as new geographies and market segments are penetrated.

Valuation

• The assumed bearish price target for Raspberry Pi Holdings is £4.41, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Raspberry Pi Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.53, and the most bearish reporting a price target of just £4.41.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $427.3 million, earnings will come to $32.8 million, and it would be trading on a PE ratio of 44.3x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of £4.48, the bearish analyst price target of £4.41 is 1.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.