Tech giant Nvidia has been the darling of Wall Street this year due to a relentless rally in its stock driven by surging demand for artificial intelligence. The Silicon Valley-headquartered firm designs and sells graphics processing unit chips that are used in data centers and go on to power AI applications. Interest in AI has surged over recent months, arguably off the back of the viral nature of OpenAI’s ChatGPT. However, Ark Invest’s flagship Ark Innovation ETF (ARKK) exited its position in Nvidia entirely in early January —before the chipmaker enjoyed a powerful rally that propelled it to a $1 trillion market capitalization. NVDA 1Y line Cathie Wood, known for her investments in next-generation technologies, was an early believer in Nvidia’s potential, owning shares when they were worth just $5, having identified the company’s capacity for deep learning. “We’ve watched this name grow from when it was just a video gaming company that people didn’t understand. We saw this potential for deep learning and enjoyed a lot of that ride,” said Frank Downing, a research director at Ark Invest. However, despite its impressive ascent to a $400 price per share, Ark decided to sell. Downing explained that this was a reaction to Nvidia’s inflated valuation, especially compared to other names in the software category. “What we’ve seen is the valuation get very rich, especially compared to some of the other names, especially in the software category,” Downing told CNBC’s “Street Signs Asia” on Friday. “So, we’ve sold out of our position and are looking for those next names that are maybe a $10 billion market cap now like Nvidia was back in 2014 that are going to be the next trillion-dollar company.” But Downing did not disregard Nvidia’s significant contribution to the hardware market. “They really are the primary provider of the hardware that’s delivering these large language models today.” He also pointed out that ARKK’s sister funds, ARK Next Generation Internet ETF and ARK Autonomous Tech & Robotics ETF , hold significant positions in Nvidia since they have different mandates to the flagship fund. This recognition, however, did not eclipse Ark’s awareness of the emerging competition. The growth of the industry and the urgent need for powerful AI hardware has led to an increase in the number of companies entering the market. Google , for instance, has developed its in-house chip, the Tensor Processing Unit, specifically designed for training large language models. Likewise, Amazon has launched its “Inferentia” AI chip under its AWS division which attempts to undercut Nvidia on pricing. Other companies, including AMD , are also stepping into the competition. Known for unseating Intel as a multi-decade leader in CPUs, AMD is attempting to cut into the AI chip market by launching its new “Instinct” GPUs. “They’re still a ways behind Nvidia and their product development, but we think it will get there eventually in the long term time horizon that we look over,” Downing said of AMD. Ark Invest hasn’t been alone in trimming an Nvidia stake. Aswath Damodaran, a professor at New York University’s Stern School of Business, cut his Nvidia holdings by half after the recent surge in share prices. “The run up has been just so astonishing that I cannot in good conscience hold on to it and call myself a value investor,” the finance professor at NYU’s Stern School of Business told CNBC’s ” The Exchange ” on Thursday. However, despite exiting a portion of their Nvidia positions, both Ark Invest and Damodaran maintain a favorable outlook for the company.
Ark Invest's flagship fund sold Nvidia before its big rally. Here's why