Scottish Mortgage Investment Trust (LSE: SMT) aims to back the world’s best growth companies. This has taken the FTSE 100 fund into private markets because firms are choosing to stay unlisted for longer.
One of its largest private holdings is ByteDance, the Chinese owner of TikTok. It was valued at $206bn in March, according to investment bank Jefferies. That would put it behind Elon Musk’s SpaceX at $241bn.
In April, US President Joe Biden signed legislation that could ban the TikTok app if ByteDance fails to divest it. Given that it has an estimated 170m American users, this is noteworthy.
So, is this a potential risk to the Scottish Mortgage share price? Here’s what I think about this issue as a shareholder.
How big is the position?
The first thing to consider is how large the ByteDance holding actually is in the trust‘s portfolio.
If it was a monster 10%+ then I’d be a bit worried. That’s because I’d expect ByteDance’s valuation to be marked down (again) were it to no longer own its TikTok asset in the US.
Consequently, that would impact the net asset value (NAV) of the trust. NAV, by the way, means the overall value of the trust’s holdings.
However, at the end of April, the ByteDance holding was valued at around £340m. That’s only approximately 2.4% of the portfolio. So this weighting is sizeable but not huge.
By contrast, its positions in Nvidia and ASML were valued at over £1.1bn each. Nvidia’s portfolio value is likely even higher now, given that its share price has surged 38% since the end of April.
What are the managers saying?
Management is quick to point out that the vast majority of ByteDance’s revenue and profits originate outside of the US.
A recent Financial Times report echoed this. It said TikTok’s US operation was responsible for about $16bn of ByteDance’s $120bn in revenue last year.
For context, that group figure would represent 60% year-on-year growth, with a reported EBITDA north of $40bn.
This highlights the scale of ByteDance’s domestic businesses (Toutiao and TikTok’s Chinese equivalent Douyin). Collectively, these apps still generate the lion’s share of profits.
Geopolitical risk
One risk outside of a potential TikTok ban is the possibility of China invading Taiwan. This situation is currently as tense as it has been for decades.
Much of the world’s semiconductors are manufactured on the island. So this would immediately have huge ramifications for global supply chains, as well as Taiwan and the wider world.
Specifically for Scottish Mortgage, it would have a hugely disruptive impact on the portfolio because 33% of it is now directly invested in artificial intelligence (AI). And this technology relies on cutting-edge chips.
My Foolish takeaway
I’d never let fear of the unknown — possible pandemics, wars and market crashes — put me off investing.
The longer my money is invested, the more time it has to grow through compounding (earning interest upon interest). So now is as good a time as ever to buy stocks.
Regarding the ByteDance issue, I’m reassured that the trust’s holding isn’t massive, and that a US TikTok ban would unlikely destroy its value completely.
Therefore, I’d still consider buying Scottish Mortgage shares as part of a well-diversified portfolio.
