Scottish Mortgage Investment Trust is a FTSE 100 fund whose aim is to invest in the world’s greatest growth stocks. Naturally, many of these are directly related to artificial intelligence (AI).
Indeed, as of 31 March, the trust had around 17% of its portfolio invested in the following three AI stocks.
The golden GPUs
First up is Nvidia (NASDAQ: NVDA). After an incredible 194% rise in just one year, the chip firm currently accounts for 8% of the trust’s assets.
Companies such as Meta, Amazon, and Microsoft-backed OpenAI (maker of ChatGPT) need tens of thousands of Nvidia’s graphics processing units (GPUs) to train and run their generative AI products.
Originally designed to boost computer game graphics, GPUs are specialised processors that excel at processing large amounts of data simultaneously.
This makes them ideal for machine learning and a wide range of applications, including generative AI, robotics, and self-driving vehicles.
No wonder Scottish Mortgage calls Nvidia “one of the foundational companies for the digital age“.
This isn’t hype. In its last fiscal year (which ended in January), the firm reported revenue of $60.9bn, which was an incredible 126% year-on-year rise. Meanwhile, net profit exploded 286% higher to $32.3bn!
Looking ahead, one potential risk is that all the tech giants are developing their own custom AI chips, while it faces direct competition from Advanced Micro Devices.
Nevertheless, the trust’s managers believe Nvidia has the competitive edge and smart leadership to remain on top.
A unique company
The second AI-related stock, also accounting for 8% of assets, is ASML (NASDAQ: ASML).
Now, this company doesn’t make or design semiconductors. Instead, it sells lithography systems that etch geometric patterns on silicon wafers to determine how microchips function.
ASML is the only supplier of the machines that are needed to build the world’s most advanced AI chips. Therefore, it possesses monopolistic qualities.
Its next-generation ‘High NA EUV’ machines are the size of a double-decker bus and cost around $350m each. So this isn’t the sort of equipment you’ll find on your local industrial estate.
Unsurprisingly, its main customers are the world’s top chip foundries: Intel, Samsung, and Taiwan Semiconductor Manufacturing Company (TSMC). Two of those accounted for over half its sales last year, so there is customer concentration risk here.
That said, ASML’s machines should remain in high demand as the West builds more foundries to diversify chip manufacturing away from Asia.
Everyone’s foundry
Speaking of TSMC, this is the latest addition to the Scottish Mortgage portfolio. It represents around 1% of assets.
On 18 April, TSMC’s chief executive said: “Almost all the AI innovators are working with TSMC to address an insatiable AI-related demand.”
Unlike rivals Samsung and Intel, the firm doesn’t compete with any of its customers. Hence why it manufactures most of the world’s AI chips. And that’s pretty much the investment case, in a nutshell.
The main risk is an escalation of Taiwan-China tensions, which could ding the share price.
Foolish takeaway
To sum up, ASML provides the machines that TSMC needs to make the advanced AI chips for the likes of Nvidia.
Scottish Mortgage shares give investors a way to invest in the ongoing AI boom. They can be volatile, but they’re also trading at a 10% discount to the trust’s net asset value. I reckon that’s a bargain.
