In 2023, investors have been hit with a barrage of news regarding recent advancements in artificial intelligence (AI) and potential breakthroughs on the horizon. The launch of ChatGPT provided evidence that next-level generative AI could be a game-changer and was the spark that ignited the recent wave of interest.
Noted investor Cathie Wood, CEO and co-founder of Ark Investment Management, poured fuel on the fire when the firm released its Big Ideas 2023 report, which estimated that AI software could have a combined value of $14 trillion by 2030. Since then, interest in AI has burned brightly, with some investors looking to Ark's holdings for inspiration.
Wood has her money where her mouth is, so let's look at a couple of AI stocks that are prominent holdings for Ark's exchange-traded funds (ETFs).
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Tesla
There's little question that Cathie Wood loves Tesla (TSLA 0.21%). The world's largest electric vehicle maker is the No. 1 holding in both the Ark Innovation ETF and the Ark Autonomous Technology & Robotics ETF, as well as a top-10 holding in the Ark Next Generation Internet ETF. The total value across these three funds is $898 million.
So why is Wood so enthralled with Tesla -- particularly as an AI stock? In a word: data. Wood argues that the companies best positioned to ride the AI revolution higher are those with significant, proprietary data sets, which will in turn create moats. The team at Ark Invest estimates that Tesla has 2.7 million cars on the road today gathering information, resulting in an unrivaled collection of real-world driving data. Wood further posts that "high-quality domain-specific AI training data could result in winner-takes-most outcomes."
Tesla's automobiles are equipped with of a multitude of sensors and cameras that support its Autopilot and driver assistance features, which constantly gather driver and vehicle data. Tesla amasses this data in the cloud to be fed to its AI system. The more data it gathers, the smarter its models become, enabling it to make even better real-world driving decisions when shared with the company's ever-growing fleet of vehicles.
Wood believes Tesla to be "a hidden gem" of AI stocks. She noted in a recent interview that Tesla has "the largest pool of real-world driving data in the world." She believes the company possesses "orders of magnitude" more of the kind of relevant information that will make the company a leader in a self-driving world.
Plus, even in the midst of challenging economic times, Tesla was able to increase revenue and maintain industry-leading profit margins. The company also noted that demand for its vehicles far outstripped production -- which suggests its growth streak has only just begun.
Nvidia
Ark Invest's publicly traded ETFs are unique, in that the firm publishes daily updates regarding the stocks it buys and sells. Wood made headlines in recent months when Ark sold some shares of semiconductor specialist Nvidia (NVDA -0.03%), but that's a myopic view and needs to be considered in context.
Turns out that Nvidia is still a top-10 holding in the Ark Autonomous Technology & Robotics ETF, and a top-25 holding in three others. The total value of those holdings is not inconsequential, at $112 million. In fact, in a recent interview, Wood said "We like Nvidia ... It's the check-the-box AI company."
Wood also noted the firm's trading strategy involves selling when the valuation gets too high, allowing it to buy the stock back when the price falls. This explains why Ark was buying Nvidia hand over fist when the stock was in free fall late last year.
So, what is it about Nvidia that makes it a "check-the-box" AI stock? You could make an argument the advancement of AI wouldn't be where it is today without Nvidia. The company's graphics processing units (GPUs) have been the chip of choice for AI research for years. The parallel processing capability -- which can handle a multitude of complex mathematical calculations simultaneously -- is a necessary component of AI systems. And Nvidia has provided the computational horsepower to make it all work.
Don't take my word for it. Nvidia controls 95% of the market for GPUs deployed for machine learning, according to estimates compiled by AI specialist New Street Research.
Nvidia isn't stopping there. The company recently launched the next generation of its H100 "Hopper" processor, developed specifically for AI applications. The company says the chip is "an order of magnitude leap for accelerated computing." The processor is nine times faster for training AI models and up to 30 times faster for inference (the work conducted by AI systems once they've been trained) than the previous-generation processor. Nvidia's audacious goal is to bring conversational AI systems -- like ChatGPT -- into the mainstream.
It also doesn't hurt that the company is the leading provider of GPUs to the cloud computing industry, with all the major cloud providers as its customers. There's also its cash-cow gaming segment, which controls an estimated 85% of the discrete desktop GPU market in the fourth quarter, according to John Peddie Research.
That will provide plenty of earnings potential while the market for AI ramps up.
