Scottish Mortgage (LSE: SMT) shares are having a good run at the moment. Year to date, they’re up about 15% versus a gain of 8% for the FTSE 100 index.
My prediction (and of course, it’s just my opinion) is that this year, returns from the growth-focused investment trust will beat those from the Footsie. Here’s my investment thesis.
A play on AI
One reason I’m bullish on Scottish Mortgage right now is that the trust has plenty of exposure to artificial intelligence (AI) stocks. I expect this area of the stock market to continue performing well in 2025 as AI technologies enjoy more adoption.
What I like about Scottish Mortgage is that it has exposure to different types of AI stocks. Not only does it own related infrastructure stocks such as Nvidia, ASML, and Taiwan Semiconductor Manufacturing Company (all involved in AI chips), but it also owns software/application stocks such as Amazon, Meta Platforms, and Snowflake.
This is important. Over the last two years, the AI story has largely been about the buildout. That’s why stocks like Nvidia have done so well. Now however, we’re entering a new phase where companies are rolling out AI solutions for their customers. In this phase, I think stocks like Amazon and Snowflake could do well.
It’s worth noting that the FTSE 100 doesn’t offer a lot of exposure to AI. There are a few Footsie companies that are rolling out solutions today, such as London Stock Exchange Group, Sage, and RELX but, in general, AI’s not a major theme for this index.
Top holdings could do well
Another reason I’m bullish on Scottish Mortgage is that I believe several of its top holdings have the potential to deliver substantial gains in 2025.
One such holding is Amazon, which at the end of January was 6.3% of the portfolio. It currently trades for around $230. However, in the last few weeks, many brokers have raised their price targets to between $265 and $290. That implies potential gains of around 15-25% from here.
Another is Nvidia (4.1% of the portfolio). Even though this company is more involved in the AI buildout, I think it has the potential to outperform in 2025. Currently, it trades on a forward-looking price-to-earnings (P/E) ratio of just 30. That’s a low valuation for this company.
Of course, there are stocks in the FTSE 100 that could perform well too. A few of the top 10 constitutions, such as GSK and HSBC Holdings, look cheap right now. I personally have more conviction in the likes of Amazon and Nvidia however. In my view, these companies have stronger long-term growth prospects.
I could be wrong
I’ll point out that there are risks that could derail my bullish investment thesis. One is a shift in sentiment towards artificial intelligence and consequently AI stocks. This could see Scottish Mortgage shares underperform the FTSE 100.
Another is an unexpected increase in interest rates. This could lead to weakness for tech stocks.
Overall, I’m still pretty optimistic about Scottish Mortgage’s prospects. I believe the trust is worth considering (as a higher-risk long-term growth investment) for a portfolio today.
