Here’s Why Cathie Wood’s ARK Invest Is Selling Nvidia Stock

Cathie Wood of ARK Invest has disclosed why she has been selling Nvidia shares (NYSE: NVDA). Here’s why the growth fund manager is shedding her stake in the top-performing S&P 500 stock.

Speaking with the Wall Street Journal, Wood said, “We have been selling NVIDIA for quite some time, mostly because we believe that for every dollar of AI hardware sold, another $10 of AI software will be sold.” She added, “we do think that expectations could be getting ahead of themselves.”

Notably, Nvidia stock, which lost two-thirds of its market cap in 2022 was the best-performing S&P 500 stock last year. It is the best-performing name in 2024 as well, as investors continue to pour money into AI (artificial intelligence) names.

The rise in Nvidia stock has catapulted it as the third largest US company after Microsoft and Apple. With its nearly $1.8 trillion market cap, Nvidia is now ahead of Alphabet and Amazon, which are also AI plays.

Why is Wood selling Nvidia stock?

Wood termed Nvidia as a “cyclical” stock and said that she has watched the shares all her career since the chip-designing company went public. Wood compared the current euphoria for AI chips to 2017 when there was a massive chip demand from the crypto industry.

“Everyone excited trying to get in at the same time, so there’s double ordering, triple ordering, quadruple ordering, and then there is an inventory correction. We think that will happen again. Whenever I hear double ordering, triple ordering, quadruple ordering in response to shortages, I do pull away from a stock like that,” said Wood.

Is AI euphoria for real or a bubble?

While many market participants believe that the optimism toward AI is real, some others see a bubble.

Even Warren Buffett and his (recently deceased) deputy Charlie Munger have also expressed concern over AI. The former compared it to an “atom bomb” at last year’s annual shareholder meeting.

Deepwater’s Gene Munster is among those who believe that we are not in an AI bubble – a view also echoed by Goldman Sachs. Peter Oppenheimer, chief global equity strategist at Goldman Sachs Research said in a note that AI stocks are in a bubble despite the rally.

Notably, even Wood does not believe that AI is a bubble, unlike the tech boom of the 90s, and termed it “real deal.” She is however worried that large companies might come up with their chips. “If you look at the hyperscalers, so the Meta platforms, Amazon, Alphabet, they’re all working on their own AI chips. They’re more specialized, so more special purpose. Whereas NVIDIA are more generalized,” said Wood.

Wood on NVDA’s upcoming earnings

Replying to what she would watch in Nvidia’s earnings which are scheduled for next week, Wood said, “We are looking for supply demand imbalances. We’ve been hearing about shortages of NVIDIA’s GPUs for roughly a year now, and when I hear shortages relentlessly, just like during the supply chain bottleneck period, I know there’s going to be an inventory unwind.”

Meanwhile, even as Nvidia shares have surged, some analysts believe that the stock is still quite undervalued as its price-to-earnings-to-growth multiple is below 1, which is a rarity among quality tech names.

The demand for Nvidia’s high-end chips soared in 2023 amid the AI pivot. The company’s chips are a key building block for generative AI models and the euphoria has helped drive Nvidia’s earnings as well as stock price higher.

How do other analysts rate Nvidia?

While Wood has been selling Nvidia shares, Wall Street analysts have turned even more bullish on the stock. Recently, Loop Capital analyst Ananda Baruah initiated coverage of NVDA with a “buy” rating and a Street high target high of $1,200.

“While we acknowledge additional silicon providers (private as well as AMD & INTC) and Hyperscale specific internal silicon solutions will be coming online over the next few years, our work suggests NVDA’s largest customers will be taking everything NVDA can give them in 2024 and 2025,” said Baruah in his report.

Bank of America also reiterated the stock as a buy and said, “We reiterate Buy/top pick ahead of NVDA Feb-21 earnings but won’t be surprised to see a notable but brief pullback after the recent parabolic run-up in the stock.”

UBS, Citi, and Piper Sandler also remain bullish on NVDA stock ahead of the fiscal Q4 report.

US chip export restrictions

In 2022, the US imposed restrictions on chip exports to China and some other countries and further tightened them last year to prevent the exports of chips that have processing powers just under the banned chips.

The US ban on exports of some high-end chips to China has hurt Nvidia and during the fiscal Q3 earnings call, CEO Colette Kress said, “We expect that our sales to these destinations will decline significantly in the fourth quarter, though we believe will be more than offset by strong growth in other regions.”

She also warned, “The export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term.”

The company is however working with the US government to come up with chips that it can export to China and late last year it launched a new gaming chip RTX 4090D in China.

A Nvidia spokesperson told Reuters that “The GeForce RTX 4090 D has been designed to fully comply with U.S. government export controls. While developing this product, we extensively engaged with the U.S. government.”

Nvidia stock has continued to rally

Meanwhile, even as Wood has been selling Nvidia shares they have risen to new record highs frequently this year. The company joined the $1 trillion market cap last year shortly after its fiscal Q1 2023 earnings report supercharged bulls where the company not only beat estimates for the quarter but its guidance was way above what markets were expecting.

Nvidia shares are only a tad short of their record highs and bullish analysts fancy their chances of it hitting its all-time high next week amid the continued optimism towards AI.