Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Catharine Flood from Scottish Mortgage to give their three stock picks.
Hello, Catharine.
Catharine Flood: Hello, Emma.
Wall: So, what's the first company you'd like to highlight today?
Flood: So, Facebook (FB) is a company that most people are familiar with, but perhaps don't really understand where it makes its money. It's changed the way we all engage in the social world. It owns four of the largest platforms and its reach now is absolutely phenomenal. It has 1.6 billion people who use their services on an active basis each month. That's roughly 1-in-5 of the world's population. It has 100 million hours of video watched in its services every day.
That offers a real proposition for advertisers. Combined with the data feedback that's available now through their services. And it allows the advertisers not just to put out their content in the way we would think of in traditional print media and on television. But to do so based on an individual user's own preferences. So, it feels relevant and timely and it's much more valuable, of course, to the advertisers.
Advertising has been quite slow to realize this. Facebook's revenues are growing very strongly. Its revenues are about 96% advertising, but it's still a fraction of the global market. Now, when you consider that in the context of its reach, that's really quite important. And we think that with this and the other big networks. So Google and in China Baidu, Tencent, really their position becomes self-reinforcing because as an advertiser you can reach so many people through that platform, why would you go to the next tier down. So, that makes it very exciting growth proposition for us as shareholders and we own all of those companies in the portfolio.
Wall: And what's the second company you'd like to highlight?
Flood: Illumina (ILMN) is changing the way that healthcare can be in the future. So, it is a gene sequencing company. In the five years that we've owned it, it's brought the cost of doing a full human genome sequence down from several tens of thousands of dollars a time to a few hundred. What that's done is change the application of the knowledge that we have in genomics from the academic sphere into the clinic room. In so doing what it's done is change its own addressable market not just a couple of times in size, but by several orders of magnitude.
But more than that it offers the prospect of personalised medicine on the treatments and therapies that are being developed off the back of that. There should be good better patient outcomes, hopefully lower costs within the system. But all of these will depend on having your gene sequence and Illumina is right at the front of that.
Second, this is a company where the relationship that we have for being long-term committed shareholders in this company gives us an insight into this growing area of importance for all of us, not just as investors. And that's something we really value because they are at the cutting edge, the (cold phase), if you will. This is equivalent to buying into the spades and shovels you'll need for that, but they really are a bit more technical and more exciting and we think it's got a long-term prospect from here.
Wall: And what's the third and final stock?
Flood: So Tesla (TSLA) has been in the news recently, the U.S. car manufacturer. With its current Model S and Model X it is luxury vehicle it competes in terms of the spec it goes -- the Model X goes from naught to 60 in 3.2 seconds. In a mode even the company calls as ludicrous. The step change here really is the announcement of the Model 3.
Wall: The affordable car.
Flood: The affordable luxury car. It's still $35,000 or thereabouts, if you want to buy it. But what this does, is it not only changes the market for the size of the market that Tesla can address, but it also means that it's changing the way we think about the car market. They didn’t spend a single dollar on advertising or endorsements and yet they managed the largest product launch by dollar sales in history. So 325,000 people paid roughly $1,000 for a car that will be delivered 2017-2018.
And that represents forward sales of $14 billion. The company has ambitions to make 500,000 cars a year. But that is in the context of a global car market of 60 million or 70 million cars sold every year. So this clearly scopes them to grow, this is about their own ability to execute. And Elon Musk who is the founder and CEO of Tesla.
Wall: Fantastic name, I think.
Flood: He is a true visionary, right across and not just car industries, but others as well. What really matters here is the scale of his ambition. In order to do that of course the company has to invest heavily, this is not a low capital growth type business. And we are prepared to back his vision for the long term. We believe it's very important that our time horizon for Scottish Mortgage of five years and beyond is in line with that of the company. We think if you want to have that kind of extraordinary ambition, that extraordinary growth potential than you have to be patient, when you are investing.
Wall: Sounds like three tech stocks, which for those unfamiliar with the companies might think that’s not very diversified portfolio. You are putting all your eggs in one basket there.
Flood: Well, it will become clear when you think about the industries that these companies operate in and really what then drives their revenues and their profits. They are vastly different. We think this is quite important. Some of the traditional labels that we've used to aggregate companies and think about the risks, just don’t seem to apply, and tech is probably the most extreme of these.
What you are really looking for is the few extraordinary businesses that can take a step change away, there is something structural in their growth that offers us the potential to make a multiple of our initial investment over that longer term piece. And that’s what we do right throughout the portfolio, whether they be public or private companies. Whether they are car companies, healthcare companies, software companies and or even traditional retailers.
Wall: Catherine, thank you very much.
Flood: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
