Cathie Wood's Ark Invest Is Selling Nvidia Stock and Buying These 2 Artificial Intelligence (AI) Growth Stocks

Cathie Wood's Ark Invest believes innovation is a key driver of long-term capital appreciation for shareholders, so the firm has constructed a series of thematic index funds focused on disruptive technologies like artificial intelligence (AI). In that context, readers may find it surprising that Wood and her team have been selling shares of Nvidia (NVDA 6.18%).

Ark cut its Nvidia position in half during the first three quarters of the year, and it continued to sell in October and November. That is somewhat surprising, because Nvidia is widely seen as the quintessential AI stock. But investors need not worry. Ark is not signaling a lack of conviction in Nvidia -- the firm still has a large stake in the AI chipmaker -- but rather taking profits because the stock has more than tripled this year.

Ark is redeploying that capital across AI software stocks such as The Trade Desk (TTD 1.67%) and Zoom Video Communications (ZM 1.57%) because it sees a much larger opportunity in that market vertical. Indeed, Ark believes companies could spend $21 on AI software for every $1 they spend on AI hardware.

Read on to learn more about The Trade Desk and Zoom Video Communications.

1. The Trade Desk

The Trade Desk is the largest independent demand-side platform (DSP) in the ad tech industry. Its software leans on what management believes is industry-leading AI to help media buyers run data-driven campaigns across digital channels like connected TV (CTV), mobile, and desktop. Its DSP was recently recognized as the most technologically sophisticated ad tech platform on the market by consultancy Quadrant Knowledge Solutions.

The Trade Desk reported solid financial results in the third quarter. Revenue increased 25% to $493 million, and non-GAAP net income increased 29% to $167 million. Investors have good reason to believe the company can maintain its momentum. The ad tech market is expected to grow at 14% annually through 2030, and The Trade Desk is gaining share in the two fastest-growing market verticals: CTV advertising and retail media.

Indeed, Forrester Research says The Trade Desk is the dominant DSP for CTV advertising, and Morgan Stanley sees the company as a leader in offsite retail media because of its independent business model. The term "independent" means The Trade Desk doesn't own media content or ad inventory, so it doesn't compete against publishers.

Here's the upshot: Publishers -- including 80% of the largest retailers in the U.S. -- willingly share data with The Trade Desk. In fact, they have an incentive to do so because The Trade Desk is the largest independent DSP. But they're less willing to share data with ad tech vendors such as Alphabet, simply because Alphabet itself is a publisher that sells its own inventory from Google Search and YouTube.

As such, The Trade Desk provides media buyers with measurement capabilities not available on most other ad tech platforms. In fact, CEO Jeff Green says it has created "the world's most advanced data marketplace." Green also believes that its unique data translates into superior AI, reinforcing the idea that its DSP can measure performance and optimize campaigns more effectively than other ad tech platforms.

Looking forward, The Trade Desk should continue to grow more quickly than the broader ad tech industry, meaning annual revenue growth of 15% to 20% through the end of the decade is a distinct possibility. That makes its current valuation of 20 times sales seem relatively reasonable, especially when the three-year average is 28.3 times sales. Investors should consider buying a small position in this growth stock today.

2. Zoom Video Communications

Zoom is best known for its market-leading videoconferencing application, Zoom Meetings, but its platform also includes an enterprise phone system, Zoom Phone, and contact center software, Zoom Contact Center, as well as solutions for messaging, scheduling, and event management.

Zoom also provides AI software products that automate various workflows across its platform. For instance, Zoom Revenue Accelerator analyzes conversations in Zoom Meetings and Zoom Phone to surface actionable insights that improve sales team productivity. Similarly, Zoom Virtual Agent can handle customer service interactions without human intervention to improve contact center efficiency.

Zoom grew at a fantastic pace during the pandemic, but that momentum has long since vanished and the company's financial performance in the third quarter was mediocre at best. Its enterprise customer count climbed 5% to 219,700, and the average enterprise customer spent 5% more. But online customer revenue declined 2%, so total revenue increased by merely 3% to $1.1 billion.

On the bright side, non-GAAP net income rose 24% to $401 million because of excellent cost controls. In addition, Zoom Phone reached 7 million paid seats, up from 5.5 million three quarters earlier. Zoom Contact Center surpassed 700 customers, up from 500 one quarter earlier. Momentum in those fresher products supports the idea that Zoom can parlay its leadership in videoconferencing into a strong presence in other communications verticals, helped along by its growing suite of AI products.

In fact, Morningstar analyst Dan Romanoff sees that as a distinct possibility. He believes strong adoption of Zoom Phone and Zoom Contact Center could push sales growth back into double-digit territory by 2025, resulting in a compound annual growth rate of 7% through 2028. That forecast makes its current valuation of 4.8 times sales seem reasonable. Investors should consider buying a small position in this (arguably) undervalued growth stock today.