Scottish Mortgage sold around £1bn worth of Nvidia shares last year on concerns the artificial intelligence (AI) darling’s margins are not sustainable, according to fund manager Tom Slater.
He likened the current AI wave to other technologies such as the invention of home computers and the mobile phone, where there was a race to lower prices.
“We took about £1bn out of Nvidia last year. We think AI is sufficiently important general-purpose technology that it will be ubiquitous but, for it to be ubiquitous, it has to be dirt cheap,” he said.
“So we have been looking at AI systems. Some of the capabilities are impressive but too expensive. That is not consistent for us with a $3.5trn company sitting at the heart of the ecosystem making 70% margins.”
There is a huge amount of investment at present into AI, with hyperscalers expected to spend as much as $300bn on the technology this year.
While “looking for the catalyst [for this to change] is hard” the manager said the current margins are “unsustainable” over the long term, particularly if AI adoption continues at pace and prices drop accordingly.
“Everybody is experimenting and looking at use cases and working out what the price point and the cost to serve will be for this [technology] to become viable,” he said.
To date, Scottish Mortgage has approached AI by buying the companies that have been “picks and shovels” of the industry, namely hardware providers Nvidia, TSMC and ASML.
“There have been relatively few opportunities to invest in the application layer so far. We have a few that we think fit into that category,” Slater said, but noted that investors need to ask themselves if companies are “going to generate supranormal returns from deploying this tech”.
Using AI, or owning an AI platform, simply is not enough, he argued. Instead it will be “what you bring in addition to AI”.
Slater pointed to the current logjam in the large language model industry, with ChatGPT one of a number of products vying for users in the space. This has kept him from investing in US firm OpenAI, despite its rapidly growing popularity.
“Whether it be ChatGPT or DeepSeek, while there are nuances, for doing a lot of tasks they are fairly interchangeable. Yet they cost billions of pounds to create,” he said.
“We’ve been cautious. It is great technology but is it a great business? I think we’re looking for more evidence from that point of view.”
However, the manager remains a fan of AI in general and even uses it in his investment process. He said there were two parts to his process: knowledge building and insight generation. While AI cannot help with providing insights, it can be used to build knowledge of a company.
In fact, he suggested managers who do not use AI will get left behind, because “an edge is really difficult to find in the financial services industry” unless using the latest tools.
But AI is not the only technology game in town. Despite being the most in-vogue part of the market for the past few years, the Scottish Mortgage manager said there is a 20-year-old technology that is still “really exciting” – e-commerce.
“E-commerce and digitisation of commerce is something we might think of as having happened, but actually there are a number of ways in which that isn’t true,” he said.
The trust invests in many stocks in this space, including long-time top 10 holding Mercado Libre in Brazil. This has been joined in the portfolio recently by SEA in South East Asia and Coupang in South Korea and Taiwan.
“E-commerce penetration is really high in the UK but there are a lot of markets where the e-commerce platforms are suddenly bringing affordable products to consumers that have not had access to them before,” said Slater.
“Coupang is an interesting example because what it demonstrates in South Korea is how penetration can still go a lot higher when you have population density and the power to order things and they appear on your doorstep the next morning.
“Then when you add financial services on top of this which is providing credit and access to financial services that consumers haven’t had before, it is really transformational and has some way to run.”