IC for 23rd July (Focusrite)

Even in the “widely depressed UK market”, audio equipment company Focusrite (TUNE) has a “strong argument to be the most undervalued stock we have seen anywhere”, according to analysts at Investec, the company’s broker.

The broker has been pushing this message for a while. In September 2025, as if on repeat, it described Focusrite as “the single most undervalued stock we can see across the market”. 

But Investec may nevertheless have a point. Based on most valuation metrics, Focusrite looks cheap, even though shares have risen 60 per cent since September. Its forward price/earnings ratio is 12 times, down from a peak of more than 40 times in 2021. Its forward free cash flow yield of 7 per cent is also attractive.

Focusrite has been struggling against forces beyond its control. It manufactures amplifiers, microphones and synthesisers for events and for content creators, as well as providing software for mixing, editing and remote device control.

While the events business (which the company calls audio reproduction) faltered during the pandemic, lockdowns boosted demand for content creation. Focusrite ultimately benefited, as content creation makes up around two-thirds of its revenue.

Moving on from shocks 

Focusrite’s shares and valuation may have surged during the pandemic, but its high-quality equipment is expensive and rarely needs replacing, so after customers stocked up on equipment during the lockdowns, they did not need any more for some time. This slowdown in its content-creation business was partly offset by the return of live events, but it wasn’t enough, and the shares sold off steeply.

As Focusrite was beginning to regain its footing, tariffs struck. The US makes up 40 per cent of the company’s revenue and it ships products from China. As tensions around the trade war mounted in the run-up to President Donald Trump’s so-called ‘liberation day’, its shares plummeted.

Management anticipated the issues by frontloading orders and building up inventory ahead of tariffs taking effect. While this demonstrated good foresight, it resulted in earlier recognition of revenues, distorting sales growth. The content-creation business reported organic revenue growth of 3.6 per cent in the 12 months to February 2026. Adjusted for the effects of tariff “phasing”, this would have been a more impressive 9.5 per cent.

Sally McKone, Focusrite’s chief financial officer, noted at the start of this month that “most of the tariffs have now been struck down” and that the company will have a “low tariff base” going forward. This should aid reporting comparisons. Focusrite increased its prices last year to “offset tariffs and inflation”, and it seems unlikely it will cut them now the situation has improved. Next year, the company will be selling products at tariff-inflated prices but without paying many accompanying levies. 

Just keep innovating 

Lockdowns, tariffs and choppy revenues have weighed on the company’s share price in recent years, but Focusrite’s long-term success is dependent on innovation. In the past year, it has increased research and development spending and started a “multiyear” programme to develop a new software platform that utilises its own specially designed silicon chips.

This strategy is reminiscent of Apple (US:AAPL), which developed its own chips to power its iPhones and then layered its own software on top. Ideally, hardware should be optimised to run software. For Apple, its dominance was built on what technologists call owning the “whole stack”.

Focusrite bull points

• High cash flow yield

• Investing in product innovation

• Strong balance sheet

• Returning to growth

Focusrite wants to give its customers better features to mix and develop their sounds, which would lock its users into its ecosystem. Its first products utilising this technology won’t be for sale until later this year, but Investec believes the pending launch can act as “a catalyst for investor interest”. 

Analysts at Berenberg also approve of the strategy. They argue it will give Focusrite “greater control over product development” and help embed its “market-leading position”.

This investment spend has eaten into Focusrite’s near-term profits. The company capitalised £11.2mn of development costs in the year to February, up from £9.1mn the year before. It also took almost £10mn of impairments in relation to acquisitions made in 2021, marking down the assets in response to the tariff volatility. The subsequent increase in amortisation expenses and impairments contributed to the company swinging from a headline operating profit of £4mn to a £0.9mn loss. 

The good news is that this elevated investment spend should fall in future years. Once Focusrite has invested in developing its own chips, it can then keep releasing new products and software updates at a lower marginal cost. Chief executive Timothy Carroll told analysts this month that the company was already through “a lot” of the initial silicon spending, and it will continue to invest in the platform “in perpetuity”. 

Electronics hardware companies have always been cyclical, but if, like Apple, Focusrite can develop a software platform that customers will subscribe to, built on top of its own chips, it would give the company a more predictable revenue stream and help offset some of the cyclical challenges it has faced these past five years.

Focusrite bear points

• Revenues yet to recover to pandemic peak

• Risky investment in custom chips

No doom loop   

Often when a company’s valuation falls, it reflects a structural problem that makes its decline hard to escape from. Perhaps it is being replaced by a new technology or its debts have built up so much that it will never be able to grow fast enough to exceed its growing interest payments. 

But Focusrite is investing in product innovation and continues to be strongly cash generative. It did not generate an operating profit in the past 12 months, but this was because of its large non-cash amortisation and impairment costs. When these are stripped out, it generated £12.9mn in underlying free cash flow. 

It has used this cash to strengthen its balance sheet, reducing its bank debt by £5.3mn over 18 months to £29.2mn. It also holds £20.6mn of cash. This healthy financial position has given the board the confidence to increase its annual ordinary dividend by 2 per cent to 6.74p.

Focusrite is past the worst of its recent macro turbulence. The company said that trading in the three months ended May was ahead of the prior year and that it was experiencing “healthy underlying demand” in both its content-creation and events businesses. Investec analysts argue that their own forecasts are “conservative” and that next year’s revenue growth may well exceed their 3.3 per cent forecast.

While Focusrite’s shares have risen by nearly a fifth since the end of June, its forward free cash flow is still just above the FTSE All-Share and few of those companies can claim to be as strong a market leader.

At this valuation, it won’t take much of an upgrade in earnings to drive a big increase in the share price. Investec analysts argue that “a return to stardom is incoming”. We agree.