On August 23, 2022, Cathie Wood's ARK Invest added over 839,000 shares of Zoom Video Communications (ZM 2.06%) to two of its funds, including the company's staple ARK Innovation ETF. The company subsequently sold off 293,600 shares of Nvidia (NVDA 0.35%).
This came one day after Zoom reported its second-quarter earnings on August 22 and just a day before Nvidia's earnings (reported on August 24). Should you follow in Wood's footsteps and ditch your shares of Nvidia and buy Zoom instead? Here's why long-term investors might want to think otherwise.
Wood's potential reasoning
One of the probable reasons Wood made this decision was simply the disparity between valuations for both companies. While both companies have fallen significantly this year -- both have plunged more than 44% year to date -- Nvidia is much more expensive. The semiconductor company trades at a staggering 53 times earnings, while Zoom trades at only 25 times.
Additionally, Zoom's quarter had some highlights. Despite facing headwinds from employees heading to work in person, the video conferencing platform saw an 8% top-line expansion to $1.1 billion on a year-over-year basis in Q2. The company also saw strong adoption from large businesses: Enterprise customers jumped 18% year over year, while customers generating over $100,000 in annual revenue soared 37% over the same period in Q2.
In a post-pandemic era and in conjunction with rising competition in the video conferencing space, Zoom has felt some headwinds. However, this partially shows the company is gaining some traction, which seemed to please ARK Invest.
Should you follow Wood's steps?
That said, the long-term opportunity for Zoom does not look excellent. The pinnacle of remote work arguably took place in 2020, and Zoom saw tremendous adoption from that. Zoom likely saw its peak market share at that point, and it's hard to see how the company could rise back to that level of success as consumers begin heading back to the office.
Granted, many employees will continue to work in a hybrid or remote environment, but the company's slowdown in growth signals that Zoom's best days might be behind it. The company's revenue expansion rate on a year-over-year basis has slowed to a halt. It's now even lower than the high-double-digit rates it posted before 2020. This has also fallen to the bottom line: Net income slumped 86% year over year in Q2.
On the flip side, Nvidia's growth story is ahead of it. The company sees a $1 trillion opportunity ahead, with most of its potential residing in some of its emerging business segments. The chip manufacturer sees a $300 billion opportunity in chips and data centers and another $300 billion in its automotive business, for example. With just $29.7 billion in trailing-12-month revenue, Nvidia has lots of room to run.
Nvidia did, however, have a rough second quarter. Q2 total revenue only rose 3% year over year, driven by a 33% year-over-year decline in its gaming segment. That said, Nvidia continued thriving where it matters most. Data center revenue soared 61% year over year to $3.8 billion, while its automotive segment jumped 45% over the same period to $220 million in Q2.
Additionally, Nvidia is generating tons of cash to fuel investments to capture the enormous market ahead. Over the trailing 12 months, Nvidia has generated $6.3 billion in free cash flow and over $7.7 billion in net income, leaving it positioned nicely to thrive over the long term.
Why Nvidia looks like the better buy
While Cathie Wood's choices may have suited ARK Invest, not every investor has to follow suit. That's especially the case here: Nvidia's long-term outlook looks incredibly bright, while Zoom is facing declining profitability, increasing competition, and slowing growth.
The short term might look grim for Nvidia, but it continues to innovate and has the cash to take a share of the space moving forward. Therefore, it might make sense to buy shares of Nvidia at a premium and watch Zoom from afar.
Both Zoom and Nvidia are giving investors reasons to be excited, but the fact is that Nvidia looks much more appealing to investors who can buy the company and hold through short-term pain. I plan to continue holding my shares of Nvidia, and you might want to consider doing the same.