When Ark Invest's Cathie Wood speaks, growth investors pay attention. Her innovation-focused funds have crushed the broader market under some circumstances and lagged behind in other market conditions, but are still seen as trendsetters in risk assessment and long-term growth investing.
This week, Cathie Wood is rising eyebrows on Wall Street with a seemingly self-contradictory review of semiconductor giant Nvidia (NVDA 6.18%). In an interview with Bloomberg TV on Monday, Wood called the stock an "obvious" play on artificial intelligence (AI) even though her Ark Innovation ETF (ARKK 1.05%) closed out its Nvidia position on Jan. 5.
So Wood thinks Nvidia is an obvious vehicle for investing in the future of AI, but she still isn't buying the stock. What gives?
Wood didn't sell Nvidia on a whim
First, you should know that Wood had a deeper analysis in mind. Here's her quote in a more complete context:
We basically reallocated into other AI plays that are not as obvious. Nvidia is very obvious now, everybody knows it. It's priced accordingly at 25 times revenues. We're cycling into Tesla, the biggest AI play opportunity out there, and it's roughly 7 times revenues.
In other words, Wood is still excited about Nvidia's business opportunity in the AI space, but the market as a whole has already embraced that idea and driven the stock's valuation sky-high. So Ark Invest missed out on some AI-based gains on Nvidia in recent months, but the stock already looked expensive when the rocket ride started -- and Ark Invest didn't mind pocketing some beefy profits at that point.
Wood mentioned Tesla (TSLA -1.11%) as a better option for new money in AI investments today, given its much lower valuation in relation to forward sales projections. In other interviews this week, she also highlighted programmable communications specialist Twilio (TWLO 1.47%) as an undervalued company with a potentially huge AI future. That stock trades at just 3 times forward sales today.
That doesn't make Tesla or Twilio automatic buys, of course. Yes, the two stocks provide a cleaner point of entry into AI investing than Nvidia does at the moment, but they come with their own baggage as well.
For example, Twilio is deeply unprofitable, and Tesla keeps running into regulatory roadblocks in important target markets like China. Their stocks are affordable for a reason. Still, you could take advantage of their price drops to start or expand your Twilio or Tesla position if you agree with Cathie Wood's AI-focused analysis.
Maximizing potential gains and managing risks
Cathie Wood's strategy involves seeking out undervalued AI plays rather than investing in companies that have already reached high valuations. By focusing on companies like Tesla and Twilio, which offer more favorable valuations in relation to their AI prospects, Wood aims to capture the potential growth while avoiding excessive pricing.
There is nothing wrong with taking some profits when your stocks fly a bit too close to the Sun, giving you more funds to allocate into more reasonably priced alternatives. If you don't want to make these decisions on the fly, you could invest in actively managed funds with a heavy involvement in AI stocks instead, such as the Ark Innovation ETF. That way, you can let Cathie Wood and her fund managers do the heavy lifting while your portfolio earns exposure to her best ideas.
Cathie Wood is simply taking an active approach to portfolio management in a volatile and unpredictable market here. I won't be surprised if Ark Invest starts buying Nvidia stock again, either after earning its sky-high valuation the hard way or taking a price correction along the way. There are plenty of other robotic fish in the AI sea, and many of their stocks are more comfortably priced than Nvidia's today.
