Catherine Wood (Trades, Portfolio)'s Ark Invest went through a very difficult 2022. The ARK funds fell under the weight of soaring inflation, a weakening economy and interest rate increases the likes of which haven't been seen since before the Financial Crisis. Though the ARK funds have experienced some relief so far in 2023, it's been relatively underwhelming, to say the least. The public has been losing faith in Wood's disruptive growth strategy for the long-term. This begs the question: are ARK's funds truly a good value now, or would growth investors be better off betting on a strong individual growth company like Nvidia (NVDA, Financial)?
ARK experiences relief, but not explosive relief
The broader Nasdaq 100 is up more than 31% year to date, while the flagship ARK Innovation Fund (ARKK, Financial) has only risen by around 28.4%. Undoubtedly, the Nasdaq 100 didn't suffer the same magnitude of declines since peaking back in 2021. In fact, the Nasdaq 100 is now closer to its all-time high than its 2022 low. The same cannot be said of ARKK, which remains down over 75% from its February 2021 peak.
The wave of relief that hit the tech sector has been concentrated on a few names with sizeable market caps. As a result, cap-weighted indices have made up for lost time. The more concentrated Technology Sector SPDR Fund (XLK, Financial) has outdone the Nasdaq 100, with an impressive 33.7% in gains year to date.
The heavy weighting in Apple (AAPL, Financial), Microsoft (MSFT, Financial) and Nvidia are to thank for the XLK's impressive surge. Indeed, such a concentration at the top of tech is hard to maintain for those looking to maintain a diversified portfolio. Still, it's not hard to imagine that most of the easy money has already been made on the mega-cap side.
Nvidia's stock price is getting frothy after latest upside surge
Though Apple and Microsoft — the two largest holdings of the XLK — have seen their multiples expand by considerable amounts in recent quarters, it's Nvidia that's stolen the show. Nvidia's stock is up a jarring 172% year to date. And the multiple expansion has gotten a tad out of hand, with shares now going for a price-earnings ratio of more than 200 after soaring 26% last week alone.
Nvidia has become so profoundly expensive that even Wood may be getting nervous. According to Ark Invest's 13F report for the first quarter of 2023, the firm sold some of its shares of Nvidia before the latest surge.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Although the broader basket of AI names has fared quite well in recent months, I think it's safe to say that not many stocks out there have been able to top the performance of the likes of Nvidia. If Nvidia's hot run continues, shares could break the $1 trillion market cap milestone. in my opinion. Regardless, such a hot stock could be at risk of a 2021-style plunge that could punish investors who jumped in after Nvidia's impressive pop.
Now, while I think it's never ideal to sell such a massive winner, Wood seems confident in her pivot towards other AI bets. "We're just pivoting to another set of plays that most people have not discovered yet," said Wood in a sitdown with Bloomberg TV.
Indeed, innovative small firms that aren't yet on the radars of everyday investors are what investors are signing up for with the ARK line of funds. Though it remains to be seen if ARKK can begin to outpace the rest of the tech space in the second half of 2023, I do not think it's all that absurd to view the ARK basket as more of a value play.
Could Wood's strategy pay off in the longer run?
I think we've reached a point where speculative tech has become the new class of deep-value stocks. Higher rates and a relative lack of profitability have weighed things down, but markets have had ample opportunity to factor this into valuations.
In a year or so from now, I think Nvidia could find itself under pressure as a cyclical boom turns into a bust. Demand for AI-ready chips is off the charts these days, but such demand cannot last forever. In hindsight, it's easy to see that Wood sold Nvidia stock too soon. Regardless, if Nvidia does end up being a bubble that bursts in a violent fashion, Wood may be in a spot to pull ahead of the Nasdaq 100 or even the XLK, both of which have sizeable stakes in Nvidia.
Final thoughts
As it stands today, personally I'd much rather be in lesser-known AI stocks with more disruptive potential than a nearly-$1 trillion chip company that's hogged the headlines for well over a week now. Between an Nvidia-heavy portfolio and ARKK, I'd have to side with ARKK. It's heavier in value and disruptive innovation, including the disruptive innovation that other market participants can't see at time moment in time.
