Why Cathie Wood Sold Nvidia: Cathie Wood, head of the popular ARK Invest group of tech-heavy ETFs, has made a name for herself over the last few years by buying shares in high-growth tech companies that many other investors believed to be overvalued.
One stock the famous tech investor may be growing less confident in, though, is chipmaker Nvidia (NASDAQ:NVDA).
ARK recently made a major sale of the stock the day before Nvidia reported Q2 earnings, calling Wood’s view on the chip giant into question. Here are the possible reasons Cathie Wood may have sold Nvidia and what she’s buying instead.
How Much of ARK’s Nvidia Stake Did Wood Sell?
Two of ARK Invest’s funds sold off portions of their Nvidia holdings before earnings were announced.
All told, this sale amounted to about 300,000 shares and was valued at over $50 million.
Although a large divestment, this was far from a complete reversal of ARK’s Nvidia position.
Combined, the two funds sold off about one-third of their Nvidia holdings.
Why Wood Could Be Turning More Bearish on Nvidia
Based on timing, it appears that Cathie Wood’s decision to sell Nvidia may have been intended to avoid losses when the earnings report came out.
This strategy, however, may not have made much of a difference. Nvidia released its preliminary financial results on August 8th, about two weeks before ARK Invest’s sale.
While not complete, the preview notified investors that expected revenues would be down about 19 percent and that Nvidia would substantially miss its prior outlook for the quarter. As a result, the market had already priced in the lower earnings.
Perhaps the most unusual aspect of this sale is the fact that Wood appears to have gone from buying Nvidia to selling it in extremely short order. Only two weeks earlier, ARK acquired over 360,000 shares in the company. While ARK’s funds are fairly active, it’s unusual to see them buy and sell on such short timelines.
One possible explanation is that Wood sold Nvidia to stave off larger losses in the coming quarters. If this is the case, it amounts to ARK correcting a perceived mistake quickly by selling off most of the shares it had purchased
Another possibility is that Wood’s sale was made to facilitate more favorable purchases elsewhere. ARK’s funds typically run light on cash, meaning that investments must be sold in order for capital to be allocated to buying new assets.
In this scenario, Wood could have been following the famous advice of Warren Buffett to sell a stock when something else looks more attractive.
Of these two possibilities, the latter seems to be more likely. The buying that ARK did about two weeks before the sale occurred after Nvidia’s announcement that it would miss its revenue outlook for the quarter. As such, it’s very unlikely that Wood believed the fundamentals of the business had changed appreciably in such a short time.
This view could also explain why Wood only trimmed her Nvidia position rather than exiting it altogether. Even if the capital was better invested elsewhere, long-term bullishness on Wood’s part might have convinced her to retain some of the stake in Nvidia.
At the same time, the decision to sell does indicate that Wood is likely becoming more bearish on Nvidia in the short term. If she believed that she would be selling the stock only a few weeks later, it’s very unlikely that she would have made the decision to buy in early August.
As such, it appears that she may have rethought the investment and decided the money would earn a higher return elsewhere.
What Is Cathie Wood Buying Instead of Nvidia?
Potentially adding weight to the idea that Wood sold part of her Nvidia stake to invest elsewhere is the fact that a large stock purchase was made at around the same time.
Zoom (NASDAQ:ZM) appears to be drawing ARK’s attention again, as the firm invested $68 million and purchased a further 839,000 in the company.
While many investors have come to think of Zoom as a pandemic-era flash in the pan, Cathie Wood has remained bullish on the real-time video communication company.
The stock remains ARK’s largest overall holding, narrowly edging out companies like Roku and Square. Nvidia is much farther down the list as the 27th largest holding across ARK’s funds.
Curiously enough, Wood’s swing from Nvidia to Zoom seems to contradict most of the analysts making projections about the two companies.
Zoom is expected to rise 25.7 percent over the coming 12 months and has a consensus rating of hold. Nvidia, by contrast, is projected to rise 54.3 percent and maintains its consensus buy rating in spite of its present difficulties.
NVDA vs ZM: The Opportunity Cost
In terms of fundamentals, however, ARK allocating capital to Zoom instead of Nvidia makes some sense.
In contrast to Nvidia’s double-digit revenue drop, Zoom reported an 8 percent year-over-year increase. Both companies are seeing markedly lower operating margins as the pandemic recedes, but Zoom’s may have already bottomed out.
Zoom also continues to perform well in terms of customer base growth. The number of enterprise clients using the service rose 18 percent year-over-year in the second quarter. Customers generating more than $100,000 in annual revenue grew even more at 37 percent.
Ultimately, it appears that Cathie Wood may have decided to reallocate capital from a small holding toward Zoom, a company in which she was already extremely confident. While both of these companies are suffering from the end of the COVID-19 pandemic, Zoom could have a more rapid path to growth and less room left to fall than Nvidia.
It’s also important to recognize that this sale wasn’t a true retreat from Nvidia on Wood’s part. Between the buy at the beginning of August and the sale at the end, ARK’s net position on Nvidia increased modestly. As such, the firm can still take advantage of an eventual Nvidia recovery if it occurs. In the meantime, however, it appears that Cathie Wood prefers to buy more of her own top stocks than attempt to bolster smaller positions within her portfolio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.