Perspectives on Progress #3

Claire Shaw – Portfolio Director

Ben James – Portfolio Director

Key Points

Northvolt worries that Europe is being left behind, while NIO helps China meet its electrification target
NVIDIA’s generative AI tools will be crucial to shaping the future of AI
While Amazon turns to healthcare to drive growth, Shopify aims to be the global operating system of commerce

As with any investment, your capital is at risk.

NVIDIA

Unleashing the power of AI

Are we at the beginning of an AI-driven revolution? Generative AI, capable of creating novel content, is on the rise. NVIDIA’s graphics processing units (GPUs) are in high demand for the immense computing power required, with around 90 per cent of generative AI programmes trained on them.

As for the potential impact on NVIDIA and society, we asked ChatGPT, the generative AI chatbot, to comment:

The rise of generative AI is not only driving growth opportunities for NVIDIA, but also has the potential to fundamentally transform society. From creating more realistic virtual worlds to aiding in medical research, generative AI has the potential to revolutionise various industries. NVIDIA’s technology and partnerships put them in a prime position to lead the charge in this transformative era. As the demand for generative AI models continues to increase, NVIDIA’s GPUs and tools will play a crucial role in driving innovation and shaping the future of AI.

Scottish Mortgage first invested in NVIDIA in July 2016. Its GPUs have emerged as critical components in the gaming, mobile and automotive industries. Now they are also widely used in enterprise datacentres used by most of, if not all, the companies in Scottish Mortgage.

Where the AI revolution takes us is unknowable. But as one of the foundational companies for the digital age that will power computer advances for the next decade, NVIDIA exposes shareholders to the disruption these advances create.

Northvolt

Europe needs to ‘act now’ to replicate US green initiatives

The Inflation Reduction Act was signed into law in the United States in August 2022. It directs new federal spending towards technologies that reduce carbon emissions while providing generous tax credits and subsidies for the electric vehicle (EV) battery value chain. Responding to this legislation, the new chairman of Northvolt – the Swedish company leading Europe’s battery supply initiatives – has called on policymakers in Europe to “act now”. He wants them to replicate these US incentives or risk an outflow of investment from the region’s battery manufacturing ecosystem.

Northvolt joins a growing roster of manufacturers concerned that the high energy costs in Europe, along with these US subsidies, are shifting momentum from Europe to North America. This lack of attractiveness in Europe is making Northvolt question whether it should consider postponing its plans for a new factory in Germany and instead focus its efforts on the US. In an industry currently dominated by Asian rivals and with the US desperate to gain technological supremacy in this field, Northvolt has become Europe’s regional champion with $55bn of orders from customers such as VW, BMW and Volvo. But the continued success of homegrown companies such as Northvolt will depend on regulators acting to prevent Europe from falling behind in the push for electrification.

Shopify

Growth and efficiency to build “the ideal company”

Shopify experienced a surge in adoption during the pandemic, nearly tripling its revenues from $1.6bn in early 2020 to $4.6bn in 2021. However, growth slowed in 2022, with sales returning to pre-pandemic levels. Despite this, the company’s growth rate remains impressive at over 20 per cent year-over-year, reaching $5.6bn in sales.

Shopify has responded to the current economic environment with cost-cutting measures and workforce reductions, as well as increasing its service prices for the first time in 12 years. Early results indicate that these measures have helped the company continue to grow efficiently while innovating for merchants.

But it will take time for the combination of efficiencies and innovation to play out.

Management’s focus on the long term, building the tools to allow merchants to sell anything to anyone, anywhere, as a ‘global operating system of commerce’, is reassuring. As Founder-CEO Tobi Lütke said on a recent call, “Profitability is a consequence of growth and efficiency combined over time. And I don’t look towards the quarters. I’m trying to build the ideal company.”

NIO

Volatility leads to opportunity in the Chinese EV market

China is the world leader in making and buying electric vehicles, with 6.8 million EVs sold in 2022. That represented 25 per cent of all new car sales in China (for comparison, the US only sold about 800,000 EVs in 2022). As a result of generous government subsidies and tax breaks, domestic EV brands in China, such as NIO, benefit from this surging demand.

NIO has been a volatile holding for Scottish Mortgage since we first bought it in 2018. Despite this volatility, we believe that the long-term investment case is firmly on track. Operational performance is strong, with the company delivering 122,000 vehicles last year. And with ambitions to now expand beyond its current premium offering to target the more mid and lower range to gain market share, NIO remains well aligned with the government’s mission to decarbonise their economy. It will play an integral role in the government achieving its target of EVs being 50 per cent of new car sales by 2030.

Amazon

Is Amazon’s third act in healthcare?

Amazon is on the hunt for new areas of expansion. After disrupting retail with its ecommerce platform and succeeding in its cloud business AWS, Amazon is now looking towards the healthcare industry as a potential area for growth.

With the recent acquisition of One Medical for $3.9bn, Amazon gains access to a network of over 200 medical clinics and almost 900,000 members. Described as a ‘Netflix for healthcare subscription’, One Medical is the first major deal for chief executive Andy Jassy, who sees healthcare as ripe for disruption due to long appointment times and complex primary care.

This move marks a significant expansion for Amazon. Although it has previously faced challenges in healthcare, Jassy believes there is a significant opportunity to disrupt the lucrative but notoriously difficult US healthcare industry.

About the author - Claire Shaw

Portfolio Director

Claire Shaw is a portfolio director and plays a prominent role in servicing Scottish Mortgage’s UK shareholder base. Before joining in 2019, she spent over a decade as a fund manager with a focus on managing European equity portfolios for a global client base. With a background in analysing companies and communicating investment ideas, Claire is also responsible for creating engaging content that makes the Scottish Mortgage portfolio accessible to all its shareholders. Beyond that, she works closely with the managers, meeting with portfolio companies and conducting in-depth portfolio discussions with shareholders.

About the author - Ben James

Portfolio Director

Ben James is a portfolio director serving Scottish Mortgage’s shareholder base. Ben joined the Scottish Mortgage team in 2023 and has worked with Tom Slater as the US equity investment specialist at Baillie Gifford since 2015. A former soldier, he developed a passion for the power of investment to drive progress during his overseas deployments. Ben works closely with the managers, meeting with portfolio companies and conducting in-depth portfolio discussions with shareholders. Alongside this, he creates engaging content that makes the Scottish Mortgage portfolio accessible to all its shareholders.

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