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

Ark Invest CEO Cathie Wood believes Nvidia (NVDA 0.03%) could soon face a reckoning. In March, she wrote:

Without an explosion in software revenue to justify the overbuilding of GPU capacity, we would not be surprised to see a pause in spending, compounding a correction in excess inventories, particularly among the cloud customers that account for more than half of Nvidia's data center sales.

That does not necessarily mean Nvidia is a bad investment. The company has navigated supply gluts in the past, and the stock has always rebounded. But Ark Invest sees better opportunities elsewhere. So Wood and her team continued to sell shares of Nvidia throughout March, while redeploying capital in The Trade Desk (TTD -0.27%), another company that stands to benefit from artificial intelligence.

Here's what investors should know about the ad tech company.

The Trade Desk is the leading independent platform for media buyers

The Trade Desk operates the largest independent, demand-side platform, a type of ad tech software that helps media buyers plan, measure, and optimize data-driven campaigns across digital channels. Its platform features what management sees as industry-leading artificial intelligence (AI) and measurement capabilities, both of which help media buyers realize greater returns on ad spending.

The Trade Desk has a particularly strong presence in connected TV (CTV) and retail media, two of the fastest-growing advertising channels. In fact, Forrester Research recently said The Trade Desk dominates the CTV advertising space, and Morgan Stanley believes the company will "ultimately be a leader in offsite retail-media advertising" due to its independent business model and growing list of retail partners.

To elaborate, the term independent means The Trade Desk is not affiliated with any websites or mobile apps, so it has no reason to steer advertisers toward specific inventory. By comparison, Alphabet's Google has constructed an advertising ecosystem rife with conflicts of interest. It sells ad tech software to third-party media buyers and publishers, while simultaneously selling its own inventory from properties like Google Search and YouTube.

That means Google has a clear incentive to direct ad buyers toward specific inventory, and the company also competes against its own customers. The upshot of those conflicts is that brands are more willing to share data with an independent player like The Trade Desk. The company has used that advantage to embed its platform with robust AI and measurement capabilities.

Specifically, The Trade Desk sources data from numerous leading retailers to create measurement opportunities not available on other platforms. Its lineup of partners includes Walmart, Kroger, Home Depot, Target, Walgreens, and Albertsons, all of which rank among the ten largest retailers in the world. The unique data sourced from those retailers also lays the foundation for superior AI, simply because data is a limiting factor in training machine learning models.

The Trade Desk gained market share in the fourth quarter

The Trade Desk reported strong results in the fourth quarter. Customer retention remained over 95% for the tenth consecutive year, revenue rose 23% to $606 million, and net income according to generally accepted accounting principles (GAAP) increased 36% to $0.19 per diluted share. CEO Jeff Green told analysts, "We outperformed the rest of the digital advertising space for the last eight quarters." He also said the company was uniquely positioned to continue gaining share not just in 2024, but also well into the future.

The Trade Desk launched a new platform called Kokai last June. It features a more advanced AI engine that synthesizes signals across 13 million impressions per second to help advertisers buy the right impression to reach the right audience at the right time. Kokai also incorporates new measurement capabilities that let advertisers assess retail-campaign performance and CTV ad quality.

Ultimately, Kokai should reduce friction and improve campaign outcomes for advertisers. That value proposition should bring more media buyers to The Trade Desk and help the company capture a greater portion of advertising budgets.

The Trade Desk stock is not cheap, but the price is tolerable

Digital ad spending is forecasted to increase at 15.5% annually through 2030, but The Trade Desk should grow more quickly given its strong presence in the quickly expanding CTV and retail-media channels. The company also believes it can accelerate growth in international markets. That is noteworthy because North America currently accounts for 88% of ad spending on the platform.

With that in mind, Wall Street analysts expect The Trade Desk to grow sales at 20% annually over the next five years. That consensus estimate makes the current valuation of 22.4 times sales seem tolerable, though certainly not cheap. Investors should expect volatility in the near term, but The Trade Desk could create significant shareholder value in the long run. Now is a good time to buy a small position in this growth stock.