Wooden Sister: Why did I sell NVIDIA this year?

As a leader in the chip and artificial intelligence field, NVIDIA is highly sought after. So far this year, its stock has risen by over 50%. However, the always optimistic "Wood Sister" about NVIDIA chose to reduce her holdings and cash out early as the stock price continued to climb.

On February 18th, Cathie Wood, the star fund manager on Wall Street and CEO of Ark Investment Management, admitted in a media interview that NVIDIA is undoubtedly a leader in the field of AI, and the AI boom is not a bubble. However, she believes that the market's expectations are too high, NVIDIA may not be able to meet them, and challenges will arise with increasing competition and inventory adjustments. She recently sold NVIDIA stocks worth about $4.5 million.

According to FactSet data, as of the end of 2023, Ark Investment held NVIDIA stocks worth over $100 million. NVIDIA's stock price has been soaring this year, contributing to about 25% of the S&P 500 index's increase, with a total market value of $1.82 trillion, making it the fourth largest company in the world by market value. It has risen by about 252% in the past year, allowing "Wood Sister" to make a fortune.

Wood Sister believes that the revenue growth brought by AI hardware sales is only a part, and the potential market and revenue from software sales will be much larger than hardware. Since NVIDIA went public, her entire career has been focused on this company. Undoubtedly, NVIDIA is a stock with very strong cyclicality. Price corrections will happen again, and increasing competition and inventory adjustments will bring challenges:

Large tech companies including Meta, Tesla, Google's parent company Alphabet, and Amazon are developing their own AI chips, which may put pressure on NVIDIA's future demand.

NVIDIA Has Risen Too Much

In the interview, Wood Sister said that everyone now knows the crucial role NVIDIA plays in shaping the computing power infrastructure. In a sense, NVIDIA has created the AI era, but she firmly believes that software will create greater value than hardware in the future:

We have been selling NVIDIA stocks for some time because we believe that for every $1 of AI hardware sold, AI software will generate $10 in revenue. Now all investors understand that NVIDIA is a key chip manufacturer.

But we do think it has risen too much. The market's profit expectations for NVIDIA are overly optimistic and may be ahead of themselves.

At the same time, Wood Sister emphasized that NVIDIA's stock has strong cyclical characteristics, which are reflected in the company's business and its stock market performance. For example, in 2017, the rise of the cryptocurrency industry led to a surge in demand for NVIDIA GPUs, causing market demand to be overly strong. Market participants were eager to buy GPUs, leading to orders that far exceeded normal demand (double orders, triple orders, or even quadruple orders), ultimately resulting in inventory backlog.Therefore, Wood Sister believes that the future demand for NVIDIA chips may not be as hot as market expectations. While NVIDIA is a leader in this field, it will face more competition in the future, and demand may slow down:

"If you look at the tech giants like Meta, Amazon, Alphabet, they are all developing their own AI chips. They are more specialized and purpose-driven. NVIDIA's chips, on the other hand, are more general-purpose.

Now, the AI boom is real. This is not like the dot-com bubble of the late 90s, this is a real boom. The seeds of innovation we are seeing now were sown in the 20 years after the burst of the bubble in the late 90s. Now these seeds that have sprouted are blooming. We believe it is a golden age now. We believe NVIDIA is a leader in this field, but it will face more competition, and there may even be a pause in demand."