Scottish Mortgage repurchases tech giant after value almost trebles in 2023

Innovation-focused investment trust Scottish Mortgage has bought back shares in Meta Platforms (formerly known as Facebook) after dropping the company from its tech-heavy portfolio in the first half of 2020.

Claire Shaw, a portfolio director on the trust, said in a December update that Scottish Mortgage had initiated a new position in Meta as managers Tom Slater and Lawrence Burns believe that it is set to be a big beneficiary of generative artificial intelligence (AI).

She said: “With 3.7 billion monthly active users, most are familiar with Meta Platforms. The reach of the ‘Family of Four’ (Facebook Blue, Instagram, Messenger and WhatsApp) makes them an advertiser’s dream, given that these platforms touch 70% of the connected population outside China.”

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Part of the investment case, according to Shaw, is that assets such as WhatsApp and Messenger have historically been under-monetised.

She adds: “We think utilising AI on these platforms will improve advertising opportunities and facilitate better monetisation through increased user connections. For example, sending people who click on ads directly into conversations with businesses in Messenger.

“These potential growth revenues, plus the opportunity for margin uplift given the change of resourcing structures internally, lead us to believe that Meta is well-placed to sit at the heart of the advertising infrastructure in the digital world.”

When Scottish Mortgage dropped Meta in 2020, as well as selling Google-owner Alphabet at a similar time, Slater said that America’s giant technology stocks had generated “prodigious cash flows” and grown at a “remarkable rate”, but he had doubts on “how they deploy their resources in the future and retain their growth credentials at vast scale”.

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Scottish Mortgage investors happily missed the 75% drop in the company’s shares between September 2021 and November 2022, which was prompted by user growth plateauing and chief executive Mark Zuckerburg’s plans to spend $10 billion (£8 billion) a year on building a virtual world known as a metaverse.

However, following a reduction in metaverse spending, developments in AI and a greater focus from the company leadership on profits, which included slimming down its bloated workforce, the shares bounced back around 190% in 2023 and are now trading close to an all-time high.

The shares trade at a price-to-earnings ratio of 31 times, according to Morningstar data, which puts them around a 50% premium to the S&P 500 index.

At a $900 billion (£710 billion) market cap, it is the sixth-biggest listed company in the world.

The potential for Meta to be a big AI winner has also caught the attention of Blue Whale Growth manager Stephen Yiu.

His £880 million fund bought back Meta after selling it in January 2022 and it is now a top 10 holding in the fund. Other big tech stocks he owns to play the AI theme are Nvidia and Microsoft.

Ahead of disclosing the repurchase of Meta, Yiu told interactive investor’s On The Money podcast at the end of November that he was considering buying back in.

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Yiu said: “Meta is a particularly interesting name as we speak today if you look at the AI development. First, we have Nvidia, which is the infrastructure play that you need to have a lot of GPU [graphics processing unit] in the back end in order to power those applications. Second, for Microsoft, you have the day-to-day application for white-collar workers to generate more work or be more productive.

“Third, if you look at which company have the most data about consumers on a day-to-day basis Meta is one of those few companies. They know they have a lot of our data through WhatsApp, Instagram and Facebook. So, if you think generative AI could utilise some of this data in time then Meta is a strong play, so we are revisiting Meta as we speak.”