Cathie Wood's Ark Innovation (ARKK 2.45%) ETF is constantly tweaking the holdings in its stock portfolio. That's been a profitable strategy in 2023 as the fund, with a net asset value of $8 billion, has generated returns of 40% so far this year.
On Thursday, the fund sold 54,847 shares of electric vehicle leader Tesla (TSLA 1.55%) -- valued at $14 million -- using more than $10 million of the proceeds to buy artificial intelligence (AI) specialist Palantir Technologies (PLTR +0.03%).
This continues a selling streak that began earlier this year, bringing the total number of Tesla shares sold to 739,637 since late April -- the last time the Ark Innovation fund bought shares of Tesla.
Is Cathie Wood souring on Tesla, or is this merely a bout of profit-taking? Let's take a look at why Wood might be selling shares in Ark Innovation's biggest holding and why she is pivoting to Palantir.
Image source: Getty Images.
Tesla is still Ark's No. 1 holding
It's important to put this string of sales into the context of the fund's current assets. In fact, as of market close on Thursday, Tesla remained Ark Innovation Fund's largest holding -- by a wide margin -- with nearly 3 million shares in stake worth $765 million, still making up about 11% of the portfolio.
This suggests that Wood is trimming Tesla as the price rises, even as the overall percentage of the portfolio grows. To close out 2022, Tesla represented just 7% of Ark Innovation's holdings. However, the stock has surged, gaining 108% so far this year (as of this writing), so even as Wood has consistently trimmed her holdings, Tesla's rise has more than made up for the sales.
Investors seeking additional evidence that Ark is still bullish on Tesla need only look at the fund's most recent Tesla valuation model. It shows that Wood expects Tesla shares to climb to $2,000 by 2027, which implies gains of 682% over the coming four years. The bull case of $2,500 and the bear case of $1,400 suggest potential gains of 448% and 878%, respectively. This illustrates that Wood remains extremely bullish on Tesla's future prospects, even as she trims a little off the top.
It also shows that Wood is being opportunistic with her buying and selling of Tesla stock.
Betting big on AI
The Ark Innovation Fund's mission is to find and invest in companies that could "potentially change the way the world works" through disruptive innovation. Palantir Technologies works at the crossroads of big data analytics and AI. The company's platform sifts through mounds of data to identify patterns that may not be obvious to the naked eye. This technology has been used extensively by the U.S. government in its never-ending hunt for terrorists, but also has broad business analytics applications.
Earlier this year, in Palantir's first-quarter shareholder letter, CEO Alex Karp wrote about the potential of AI, saying, "The arrival of the latest large language models (LLM), which have provided the world with the first real hints of more generalizable forms of artificial intelligence, will transform enterprise software." He also noted that the "depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent."
Wood isn't the only one who thinks Palantir represents a compelling opportunity. Just last month, Wedbush analyst Dan Ives called Palantir the "Messi of AI," with a buy rating and a $25 price target on the stock, which suggests upside of 79% compared to Thursday's close. Ives went on to say that Palantir "has built an AI fortress that is unmatched and poised to be a major player in this AI revolution over the next decade."
Palantir has consistently defied expectations this year. Second-quarter revenue of $533 million jumped 13% year over year, and the company generated its third consecutive quarter of generally accepted accounting principles (GAAP) profitability, accompanied by strong operating and free cash flow.
Wood's bet on Palantir appears to be opportunistic. The stock had tumbled 30% over the past three weeks, giving Ark a more compelling entry point. Even after its recent haircut, the stock is up 119% so far this year, though it's still down 64% from its 2021 peak. Ark Innovation's recent purchase brings its total stake in Palantir to more than 6.7 million shares worth $93 million, or about 1.3% of Ark Innovations' total holdings.
Disruption for the win
It's no secret that Wood is bullish on the ongoing potential of AI. Ark's Big Ideas 2023 report said that AI was a catalyst, "cascading through all other technologies," and that these disruptive platforms could grow 40% annually, from $13 trillion today to $200 trillion by 2030.
Given the overall market dynamics, it isn't surprising that Wood would trim some of Ark's large and growing Tesla position to increase her bet on generative AI -- and Palantir is one of the most promising pure-play AI stocks out there.
