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The Scottish Mortgage Investment Trust (LSE:SMT) share price has delivered strong returns for shareholders over the past 12 months. And there are several reasons for this.
An investment trust‘s market value (share price) is driven by supply and demand, influenced by the value of its underlying holdings. This is measured by the Net Asset Value (NAV).
For trusts holding public stocks, the NAV can be updated daily, and it serves as the benchmark to determine if the trust is trading at a discount or a premium.
However, Scottish Mortgage has investments in privately-held companies as well listed stocks, and this does make the NAV a little more challenging.
For some time, the trust’s traded below that NAV figure. One reason is that many investors had their fingers burned in 2021 when growth stocks — which most Scottish Mortgage investments are — plummeted.
Another might simply be the fact that UK-listed companies and trusts don’t typically trade at fair value. That’s been the case for a while, although there’s probably a good case to say that a few banks and other household-name stocks have pushed too high in the recent rally.
The big driver
Scottish Mortgage has a relatively diverse set of holdings. However, some companies and sectors are more represented than others. When it comes to technology, its hardware investments such as Nvidia and TSMC have vastly outperformed its software holdings including Spotify.
However, there’s one that stands out, and that’s SpaceX, the company’s largest holding. Representing 15.2% of the portfolio, SpaceX has a disproportionate impact on the NAV (the second largest holding is just 5.3%).
And if you’ve been watching SpaceX closely, you’ll be aware that the company’s valuation has surged in recent funding rounds. What’s more, it could go higher.
A SpaceX IPO (going public on the stock market) is likely this year and could value the company at as much as $1.5trn. I’d suggest that’s a lot higher than the figure currently used to calculate Scottish Mortgage’s NAV — possibly $800bn.
Where could the stock finish the year?
This is the million-dollar question. And in all honesty, it’s impossible to answer accurately.
However, my belief is that SpaceX will propel the share upwards even if there’s some underperformance elsewhere. I believe SpaceX will rival Nvidia as the world’s most valuable company in the 2030s, and we could easily see it representing 30% of the Scottish Mortgage portfolio by the end of the year as some of that potential’s realised.
In addition to the IPO, SpaceX is planning to send Starship to Mars this year. A successful landing, and potentially even the brief deployment of a Tesla humanoid robot, could push that valuation significantly higher.
Of course, SpaceX is just one part of the puzzle. While Scottish Mortgage has a great reputation for picking the next big winners, there are risks too.
One of which is leverage. The trust borrows to invest, which is great when investments go up in value but not so good when investments fall. In fact, it can magnify losses.
Nonetheless, I’m still optimistic about Scottish Mortgage and while it’s just my opinion, I won’t be surprised to see it trade at least 15% higher by the end of the year, in part driven by a near doubling of SpaceX’s valuation.
I certainly think it’s worth considering.
