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I have a lot of income stocks in my portfolio, but I'm also always looking for a good growth stock to buy.
One of the challenges when buying British shares is that, while there are many income stocks to choose from, London has not seen in the last decade the same level of compelling growth stocks that are available on stock markets like the US.
So simple computer maker Raspberry Pi's recent listing got me thinking. Is this the type of technology company I would like to buy for my ISA?
History of strong growth
The first thing that strikes me is that Raspberry Pi has really had a tailwind in recent years.
Last year, for example, sales increased and revenue increased 41% to $266 million. Profits grew even faster, increasing 85% to $32 million.
The newly listed company has a market capitalization of £817m. That means the current price-to-earnings (P/E) ratio is around 33.
That's more than you'd normally pay for a stock, although if earnings growth continues apace then the forecast P/E ratio is lower.
The future looks bright
That kind of growth is impressive to me. But as an investor, I can't rely on the past as a guide to what may happen in the future. Instead, I need to consider the underlying investment case, looking at issues such as what might happen to customer demand and how the company can differentiate itself from its rivals.
I think Raspberry Pi looks strong from this perspective despite its relatively small size compared to industry giants. Its focus on the cheap end of the market and simple products sets it apart from most computer manufacturers.
But thanks to the production of proprietary hardware and having a custom programming language, there are actually significant barriers to entry that help prevent other low-cost manufacturers from taking your lunch.
A significant existing customer base is an advantage. The company's continued effort to find new applications for its product range could further broaden customer appeal.
I'm tempted to buy
There are risks here. Competing at the lower end of any market means a manufacturer has less flexibility to absorb price increases. So, for example, higher global shipping rates could impact profit margins.
While the Raspberry Pi brand has its fans, many potential customers are unaware of it and reaching them could mean spending a lot more on marketing in the coming years.
But I think this growth rate is really promising. You already have a proven, profitable and growing business in a market that I believe could expand in the future.
However, as a newly listed company, only limited financial information is available so far. Also, the valuation worries me a little. I don't think it's a bargain and fear it could become too expensive if growth rates fall. So for now, I'll be watching without investing.
