Scottish Mortgage Investment Trust (STMZF) shares have been on a downward track this year after investors moved away from growth stocks. The trust has been one of the UK’s most successful in recent years, but it's lost nearly half of its value over the past 12 months. 

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The UK-listed fund has significant exposure to American, Chinese and unlisted shares. The fund’s managers focus on picking “big winners” and have previously chosen well, buying growth and tech stocks such as Tesla, Moderna and NIO at early stages. 

The Scottish Mortgage share price collapse reflects the declining value of the stocks it holds. 

So, what stocks does SMT hold?

 SMT’s biggest holdings are almost entirely growth and tech stocks. The fund’s biggest holding is Moderna (MRNA), while other top-10 holdings include NIO (NIO), Tesla (TSLA), Tencent (TCEHY), Nvidia (NVDA), and Illumina (ILMN). 

All of these stocks have fallen considerably over the past 12 months. 

In fact, only one of Scottish Mortgage’s top 10 holdings isn’t a tech stock. That’s Kering (PPRUY). The French conglomerate owns brands like Gucci, Alexander McQueen and Yves Saint Laurent, but has seen its share price crash over the past year. 

The top three shares owned by Scottish Mortgage make up around 20% of its portfolio. These are Moderna (7.12%), Tesla (6.6%) and ASML (ASMLF) (6.39%). The big issue for me is that I wouldn’t buy any of these shares individually.  

Why did SMT stock fall this year?

Tech stocks started to look very expensive last year. Growth and tech stocks often trade on the prospect of future earnings, so can look very expensive according to metrics like price-to-earnings. In 2021, many investors started reevaluating how much these stocks were actually worth. 

2022 started with a tech sell-off on the back of a surge in US Treasury yields. Investors started looking for value and dividends as inflation hit levels not seen in decades and interest rates rose. 

Three reasons I’m not buying SMT

Reason 1: Moderna

I still think Moderna is overvalued despite its falling share price. The biotech firm delivered a lifesaving vaccine during the pandemic, but it still only has one commercial product. In fact, I’m a little concerned that Moderna may not have another commercial product for a number of years. Moreover, 98% of its revenue is currently coming from the mRNA COVID-19 vaccine and the other 2% is coming from government grants. 

Firstly, I foresee demand for its COVID-19 vaccine falling considerably in the coming years. In fact, I think we have already seen peak demand. There were only $2.5 billion of new deals signed for its COVID-19 vaccine in the near three months between January and March – equivalent to around $830 million a month. This rate of sales is much lower than previously observed. 

I can see revenue declining from $21 billion in 2022 to just $2 billion in 2024 unless COVID becomes more virulent. 

However, I appreciate that Moderna’s technology is considered hugely important, and many believe it has the capacity to treat a wide range of diseases. But there’s obviously a lot of risk here and we don’t know whether its products in trial will become commercially viable. 

Reason 2: Tesla

I also think that Tesla is vastly overvalued. It currently has a price-to-sales ratio of 13.5, which makes it much more expensive than its Chinese competitor NIO. Tesla is the only profit-making EV maker at this moment in time, so it’s hard to compare P/E ratios. However, Tesla’s P/E of 120 certainly isn’t cheap. I’d much rather put my money into a dividend-paying bank like Lloyds which has a P/E of just 5.9. 

In addition to looking expensive, I also think Tesla might find its dominance in the EV sector being eroded by established car manufacturers. For example, Mercedes has recently driven a concept car more than 1,000km without recharging the battery. When it arrived at its destination in southern France, it still had 100km of range left over. 

I also think that Tesla will come under pressure from manufacturers like MG who can bring out much cheaper options. MG’s ZS EV (SUV) is almost £20,000 cheaper than the cheapest Tesla. 

Reason 3: ASML

ASML Holdings makes chip-fabrication equipment. In fact, the Dutch firm is a world leader in the production of lithography machines. It’s got great long-term potential, but at this moment in time, it's struggling to keep up with demand. I think it looks expensive with a P/E ratio of 40.  

Having said that, there are a lot of positives here. The company had net bookings worth €7 billion in the first quarter of 2022. The figure was well ahead of analysts' expectations of €3.7 billion. 

There is also massive demand for semiconductors, and it’s anticipated that there will be a backlog until 2024. In the meantime, we can expect demand for ASML’s lithography machines to remain high. 

Finally, AMSL’s leading tech isn’t going to be copied and mass produced in China any time soon. Lithography technology is protected from Chinese manufacturers by the Wassenaar Arrangement. Despite China’s push on hard tech, it’s still some way behind in this area.

Why I might buy soon

SMT has a habit of picking big winners, just look at Moderna and Tesla. The fund bought in during the early years and has still made a huge profit on these companies, even if they exit at the current price. So, it’s highly possible that SMT might have the next big winner already sitting in its portfolio.

One company I particularly like, although it is pretty well known, is NIO. The Chinese EV maker looks much better value for money than Tesla and I’m a big fan of the brand's offerings.

NIO’s vehicles rival Tesla for range, and they have a number of features which I think will do well. Firstly, NIO’s ET7 can go as far as 1,000km on a single charge, putting it some way ahead of its Tesla equivalent, albeit according to different testing standards. It also employs swappable battery technology that allows owners to drive to a NIO garage and change their empty battery for a full one in a matter of minutes.

NIO’s cars also feature an Alexa-like device called Nomi. The dashboard-mounted gadget is voice controlled and can do things like open the windows and even take a selfie. It’s going down well in China from what I’ve heard. 

Finally, NIO is setting itself up as more than just a car manufacturer. Owners can buy NIO products from the NIO Life store. It sells everything from breakfast cereal to wine and loungewear. I like this recognition that customers buy groceries more often than cars. It could certainly be a good additional revenue stream. 

Should I buy SMT?

If I do buy SMT, I’ll be buying it partially because of their track record of picking the next big winner. However, I still think it’s got some way to fall.