The Scottish Mortgage Investment Trust (LSE:SMT) share price hasn’t enjoyed the rally that the broader FTSE 100 has. In fact, while UK blue-chip shares are soaring, the tech-based trust has recently slumped to its cheapest since late December.
Are investors making a mistake here? After all, the trust trades at a meaty discount to the value of the sum of its parts.
Shares currently trade around 710p per share. This is a 19% discount to a net asset value (NAV) per share of 875.11p record at the end of January.
The sinking share prices of key tech holdings like Moderna and ASML will have pulled that NAV lower in February, too. Yet the margin between Scottish Mortgage’s share price and NAV is likely to remain significant.
Frothy valuations
I’m a huge fan of investing in value stocks. And like billionaire investor Warren Buffett, I’m a big believer in buying shares when they fall in value. This can be an effective route to generating long-term wealth.
However, Scottish Mortgage is a share I’m not prepared to buy for my own portfolio. In a nutshell, I wouldn’t buy many of the businesses that the trust currently holds today. And that’s because I believe many of these stocks continue to trade on unappealing valuations.
The Covid-19 pandemic hastened the digitalisation of our everyday lives. Themes like the rise of flexible working and the e-commerce boom, for example, have led to speculation that semiconductor demand will explode.
Bu I believe that frenzied investor interest in tech stocks has priced in unrealistic earnings expectations. Some forecasts are looking overly optimistic, too, as slowing global economy pinches consumer spending. Recent trading data underlines how over-the-top investor assumptions have become.
Big disappointments
Silicon Valley darlings Alphabet and Apple are among the latest tech giants to release underwhelming results.
Sales at Google and YouTube owner Alphabet rose just 1% in the fourth quarter, the business announced early this month. Consequently both revenues and profits fell way short of estimates. Earnings at Apple meanwhile missed estimates for the first time since 2016. Weak iPhone sales caused quarter-four sales to slip 5%, it said.
Further rounds of heavy job cuts have worsened the sector-wide gloom as well. PC manufacturer Dell and video conferencing giant Zoom, for instance, have announced plans to cull 5% and 15% of their respective workforces in recent weeks.
News flow isn’t suggestive of a technology sector in good health. And there’s no sign of when the unsettling run of releases will draw to a close. Scottish Mortgage’s share price could have much further to fall.
The verdict
The world is becoming increasingly tech dependent. And some of the firms that Scottish Mortgage Investment Trust holds will play an important part as digitalisation accelerates.
I also like the trust’s high exposure to China. Company profits in this region could soar as personal wealth levels balloon.
But the huge valuations of many tech shares is enough to encourage me to invest elsewhere. I’d rather buy other FTSE 100 shares today.
