Portfolio Update Q3 2026

Here is the analysis of the Scottish Mortgage Q3 2026 portfolio update chapter.

At a Glance

This edition is presented by investment specialist Hamish Maxwell. The core thesis is that AI is ushering in a "new industrial age," shifting the center of value creation from pure software to the intersection of "bits and atoms." The most significant judgment in the entire presentation is: as intelligence itself becomes cheap, scarcity is shifting to the physical infrastructure that supports it (chips, electricity, data centers), reshaping the entire value chain from a "pyramid" into an "hourglass."

The New Industrial Age: Is Hardware "Eating" Software?

Hamish Maxwell argues that AI is overturning the growth investing axiom of the past two decades: "bits over atoms."

In the past, software occupied the top of the value chain due to its zero marginal cost, while the physical world was seen as "heavy, slow, and capital-intensive." However, Maxwell points out that the rise of AI has changed this landscape. Citing a recent conversation with Jeff Bezos, he emphasizes that AI increasingly resembles "the beginning of a new industrial age," rather than another software story.

• Mechanism Breakdown: Cheap and abundant intelligence requires a vast physical system to support it—chips, electricity, data centers, factories, and robots. When intelligence itself becomes cheap, scarcity shifts to "the physical things needed to put that intelligence into practice."
• Clarification: Maxwell explicitly states this is not "hardware eating software." Software, proprietary data, and customer relationships remain crucial. The real opportunity lies at the intersection of "bits and atoms."

The Hourglass Value Chain: Scarcity at Both Ends

After conversations with leading global AI founders, Tom Slater offers a key insight: value may increasingly concentrate around intelligence, rather than just within it.

This changes the shape of the AI value chain, making it more like an "hourglass," with scarcity concentrated at both ends.

Value Chain Position	Source of Scarcity	Logic of Value Creation
Bottom (Physical Layer)	Electricity, data centers, compute, memory	Physical scarcity creates pricing power. As AI demand accelerates, these bottlenecks become more important and valuable.
Middle (Intelligence Layer)	Intelligence itself (becoming abundant)	Value may shift to both ends. Investing in this area requires exceptional selectivity.
Top (Application Layer)	Proprietary data, distribution channels, customer relationships, physical AI applications	The strongest companies can compound growth through proprietary advantages.

• Exception & Deduction: Maxwell adds that not all intelligence will become commoditized. "Frontier models" like those from Anthropic may retain true scarcity and differentiation. This also helps distinguish "compounders" from "dabblers"—the former are companies whose business models are genuinely reinforced by AI, while the latter merely add AI features without creating a durable advantage.

The Binary Future of Intelligence and Founder "Metabolic Rate"

Maxwell proposes that the value of intelligence will likely undergo "binary divergence."

• Historical Context: Human intelligence was once scarce, expensive, and difficult to scale. Today, frontier AI capabilities are extraordinary, but building and running them is costly.
• Future Deduction: Everyday intelligence (writing, reasoning, coding) will become cheap and abundant, with value shifting around it to AI-enabled products, efficiency, and infrastructure. Conversely, frontier intelligence (solving the hardest problems, like scientific discovery, autonomous agents) may remain scarce, with value still residing in the intelligence itself.

Regarding organizational form, Maxwell emphasizes the enduring importance of "technical founders."

• Core Argument: A founder's advantage is not in perfectly predicting the future, but in their instinctive ability to identify technological changes shaping their business. This "founder metabolic rate"—the ability to act before insights travel up the organization and are translated into strategy—is key.
• Supporting Examples: Founder-led companies like NVIDIA, Shopify, and Meta all exemplify this: they identify changes early, act before trends are obvious, and compound their advantages through a culture of rapid learning and adaptation.

Portfolio in Action: From SpaceX Capital Recycling to New Opportunities

Maxwell demonstrates how the portfolio is positioning for the new industrial age through capital recycling, spanning both "bits" and "atoms."

• Capital Recycling Case: SpaceX. Scottish Mortgage first invested in SpaceX in 2018 at a valuation of approximately $30 billion. By the time of its recent IPO, with a valuation near $2 trillion, the position had grown to roughly a quarter of the portfolio. While conviction remains high, given concentration risk, they are "meaningfully reducing" the position as trading restrictions lift, redeploying some capital into new opportunities.
• New Investment Landscape: New purchases span four quadrants, embodying the "bits and atoms" combination:
• Public Atoms: KLA (semiconductor production quality control), DISCO (wafer dicing and grinding).
• Private Atoms: Hadrian (defense manufacturing software and automation), ICON (reshaping construction with robotics, software, and new materials).
• Private Bits: Chai Discovery (using AI to design drugs, shifting drug discovery from trial-and-error to a systematic process).
• Public Bits: Bending Spoons (applying a replicable operating model to improve mature software companies).

Position Moves

Position	Analyst Stance	Key Data
SpaceX	Reducing (Capital Recycling)	2018 valuation ~$30B → IPO near $2T, once ~1/4 of portfolio.
NVIDIA	Bullish (Founder Leadership Case)	Not disclosed
Shopify	Bullish (Founder Leadership Case)	Not disclosed
Meta	Bullish (Founder Leadership Case)	Not disclosed
KLA	New Position (Public Atoms)	Not disclosed
DISCO	New Position (Public Atoms)	Not disclosed
Hadrian	New Position (Private Atoms)	Not disclosed
ICON	New Position (Private Atoms)	Not disclosed
Chai Discovery	New Position (Private Bits)	Not disclosed
Bending Spoons	New Position (Public Bits)	Not disclosed
Anthropic	Neutral/Watch (Frontier Model Scarcity Case)	Not disclosed

Judgments Worth Remembering

1. "'Hardware is eating software' is misleading; the real opportunity lies at the intersection of 'bits and atoms.'" (Hamish Maxwell) — The "bits over atoms" axiom of the last two decades is broken; AI requires vast physical infrastructure, creating new scarcity and pricing power.

2. "The AI value chain is shifting from a 'pyramid' to an 'hourglass,' with scarcity concentrated at the physical bottom and application top." (Tom Slater) — Intelligence in the middle layer is becoming abundant, shifting value to both ends; physical scarcity (chips, electricity) and proprietary advantages (data, customer relationships) are key to value creation.

3. "Everyday intelligence will become cheap and abundant, while frontier intelligence may remain scarce." (Hamish Maxwell) — Future intelligence will diverge binarily, with value flowing in different directions: efficiency and infrastructure around everyday intelligence, and value still within intelligence itself for frontier models.

4. "'Founder metabolic rate' is a key organizational advantage for navigating rapid technological change." (Hamish Maxwell) — Technical founders can instinctively identify and act on technological shifts; this ability is more important than perfect foresight and is a common trait in companies like NVIDIA, Shopify, and Meta.

5. "Scottish Mortgage is recycling capital from mega-winners like SpaceX into a new generation of opportunities." (Hamish Maxwell) — SpaceX grew from a ~$30B valuation in 2018 to nearly $2T at IPO, comprising ~1/4 of the portfolio; to manage concentration risk, they are meaningfully reducing the position and redeploying capital.

6. "New investments span four quadrants, from semiconductor equipment (KLA, DISCO) to AI drug discovery (Chai Discovery), illustrating the breadth of the 'new industrial age.'" (Hamish Maxwell) — Investment is no longer limited to pure software, covering physical-digital intersections like defense manufacturing (Hadrian), construction (ICON), and mature software operations (Bending Spoons).