Cathie Wood is supposed to be the stock guru that spots the next secular tech trend, capable of transforming your dollars into millions. Recently, she has been caught wrong-footed.
The meteoric rise in Nvidia Corp’s shares prompted the founder of Ark Investment Management to defend the decision to cut holdings in the chipmaker in January. Wood’s flagship ARK Innovation ETF has missed out on most of Nvidia’s $600 billion rally this year, and therefore underperformed plain-vanilla index funds that track the Nasdaq.
“We’re just pivoting to another set of plays that most people have not discovered yet,” Wood said. “Much like they did not understand that Nvidia was an AI play, really, until very recently.” Balking at Nvidia’s valuation of 25 times expected sales, she prefers the likes of UiPath, which trades at just over six times.
It’s interesting that Wood is starting to complain about lofty valuations, which she did not shy away from in the past. She famously had a $3,000 price target for Tesla Inc and was sticking with $1 million Bitcoin forecast
earlier this year.
Of course, Wood can continue with her treasure hunt. But as a portfolio
manager, she should know that “macro” matters. In fact, during the early days of the pandemic, her ARK funds were a major beneficiary. The Federal Reserve’s aggressive quantitative easing enriched consumers with government stimulus checks and whetted their appetite for the high-flying growth stocks that ARK prefers.
Macro is as much at play now, except the tide is receding from the ARK funds’ speculative trades. Investors are warming up to artificial intelligence, but they also want to play it safe.
As a result, they are buying large-cap stocks — a trade that worked for much of the past decade — with an exposure to AI. Nvidia, which has a $40,000 chip designed for generative AI, has become popular. So has
Microsoft Corp, OpenAI’s biggest investor and a key partner. UiPath is at most an after-thought.
It’s a sensible move. With even short-term borrowing costs averaging an elevated 8.5 percent, smaller businesses can’t scale up on AI as effortlessly even if they have the know-how. Large corporations, by comparison, have the financial might to dominate the field. Already, Nvidia’s Chief Executive Officer Jensen Huang this week unveiled a new batch of products and services to capture the AI boom.
In other words, in this environment, an active asset manager has to make
her bullish bets out of a list of large-caps, hoping that one can morph into a trillion-dollar company. The latest tech rally is leaving small-cap stock pickers in the dust.
Frankly, Wood’s defense is unconvincing. She may have discovered Nvidia’s AI potential as early as 2014 and bought at $5 a share, but why didn’t she capitalize all the way? Did she fail to grasp the popularity and disruptive power of ChatGPT, which was launched last November? Of all people, Wood should know that a trading frenzy can send asset prices to euphoric levels. Compared to the run-up in the ARK Innovation ETF — or Bitcoin — three
years ago, what Nvidia experienced is not extraordinary.
To be sure, Wood can’t just pile into the biggest tech names like everyone else, or she won’t be able to justify the hefty fees her ETFs are charging. But this Nvidia misstep has dented her reputation.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. Views are personal, and do not represent the stand of this publication.
Credit: Bloomberg
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