Scottish Mortgage Investment Trust (LSE:SMT) shares continued their decline on Tuesday morning, falling by 3% in early trading. The stock has been one of the UK’s best-performing investment trusts but has experienced considerable volatility over the last year.
Why has the stock fallen?
The trust is heavily focused on tech stocks, which tumbled at the beginning of the year as investors moved from growth to value. The global fall seen in the price of these stocks has negatively impacted the Scottish Mortgage share price. While a number of Scottish Mortgage’s holding rose during the pandemic, they have been struggling in recent months. Holdings include Tencent, NIO, Nvidia, and Illumina, all of which fell over the last year.
Tech stocks dropped on worries about higher inflation and tighter monetary policy from the Federal Reserve. January’s sell-off came on the back of a surge in US Treasury yields, which hurt more expensive technology stocks that are valued on future growth expectations.
Is it looking cheap?
Having fallen 32% over the last six months, some might consider this stock cheap. But inflation and higher interest rates, among other things, have made me reconsider the valuation of Scottish Mortgage and some of the stocks it holds.
Some of its holdings are hard to value. Its largest one is Moderna — the company that created the lifesaving mRNA vaccine during the pandemic. This was a big winner during the Covid crisis, but I’m not sure about its future. Moderna’s profits are predicted to fall from $12bn in 2021 to just $2bn in 2024 as demand for Covid-19 jabs decreases.
Another stock that features heavily within the trust’s holdings is Tesla. The Elon Musk-controlled EV firm represents more than 5% of the portfolio. This is another stock I have struggled to value. Last year, it crossed the $1trn valuation for the first time, but I’m not sure about its long-term prospects.
During its record-breaking 2021, Tesla reported revenues of just $53.8bn, leading to adjusted EBITDA of $11.6bn and net income of $5.5bn. Personally, I think it is a long way off being a company that is genuine worth more than $1trn. This is compounded when I consider the increasingly competitive EV market. In the UK, I can now buy MG’s electric SUV for £20,000 less than the cheapest Tesla.
Tencent also represents a major holding and the Chinese firm has reported falling revenue growth in recent years.
Should I buy?
This stock has been one of the best-performing UK funds in recent years. Outgoing manager James Anderson noted that the strategy can involve “periods of pain”, but remains confident on future growth. It has been successful in picking some big winners and many investors will hope it will continue to do so.
However, I think there’s a good reason for the fall in the Scottish Mortgage share price. Fundamentally it comes down to the long-term prospects of its tech-heavy portfolio. High inflation and interest rate rises have engendered a rethink of how my portfolio should look. Instead of looking for growth potential, which may be impacted by inflation and interest rates, I’ve been looking for value right now. While I appreciate that the Scottish Mortgage Investment Trust has been very successful in the past, I’m currently favouring stocks offering inflation-beating dividend payments this year.
