Categories: Stock Market / Technology
Topics: Alternative Investments / Artificial Intelligence

What AI Stocks is Cathie Wood Buying Now?

Over the summer, tech giants like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Nvidia (NASDAQ: NVDA), Meta Platforms (NASDAQ: META), and Amazon (NASDAQ: AMZN) made up a significant 51.0% of the Nasdaq 100 Index's market capitalization. Astonishingly, they contributed to a staggering 68.8% of the index's year-to-date rally of 39.4%.

The current high valuations of many mega-tech stocks are attributed to investors seeking quick exposure to AI by adding these well-known companies to indices. For instance, Nvidia trades at a price-to-sales multiple of 40.5x due to its dominant role in providing chips for deep learning workloads.

Historically, when technology hardware companies have traded at more than 25-times trailing twelve-month revenue, subsequent returns have tended to underperform. One only needs to look at Cisco (NASDAQ: CSCO) during the dotcom bust for a clear example. 

Despite that, I still think Nvidia has more upside potential. However, there are a couple small AI-related companies in ARK's portfolios that have more attractive valuations at this time.

Cathie Wood has always managed to be somewhat ahead of the crowd when it comes to tech picks. And she’s recently set her sights on some potential gems in the field of artificial intelligence that have yet to gain significant attention from quantitative research.

AI Stocks in ARK’s Portfolio 

2 notable examples of high-conviction investments within several of ARK’s public equity strategies, including the ARK Disruptive Innovation Strategy (NYSEARCA: ARKK) and the ARK Next Generation Internet Strategy (NYSEARCA: ARKW), are listed below:

1. UiPath (NYSE: PATH): UiPath Inc. provides a comprehensive automation platform encompassing various robotic process automation (RPA) solutions applicable across industries. Their platform is designed to empower both technical and non-technical users to create application-specific automations with minimal coding requirements. 
   1. Notably, UiPath differentiates itself by mimicking human behavior through a combination of artificial intelligence and machine learning (AI/ML) along with application programming interfaces (APIs). 
   2. UiPath's focus on user-friendly low-code/no-code interfaces emphasizes flexibility, scalability, and ease of use without the need for proprietary AI/ML models or infrastructure changes. ARK maintains strong confidence in UiPath's potential to integrate Robotic Process Automation (RPA) into various enterprise processes on a global scale.
2. Twilio (NYSE: TWLO): Twilio is poised to become a leading provider of customer communication platforms, including essential messaging APIs and a suite of software products. With offerings such as the Flex contact center software and the Segment customer data platform, Twilio is well-positioned to introduce artificial intelligence into customer communication channels.
   1. Leveraging vast data assets derived from billions of business-to-consumer interactions, Twilio can train AI models to cater to a wide array of use cases and industries. As time progresses, its application software revenue is expected to boost gross margins. 
   2. ARK maintains a long-term belief in Twilio's ability to drive modern enterprise-to-customer communications, especially as global mobile phone adoption continues to rise. Twilio's flexible, consumption-based pricing model allows customers to adjust their spending easily, making it well-suited to capitalize on the AI opportunity once macroeconomic conditions stabilize.

Private AI Companies in ARK Venture Fund

In addition to these public equity strategies, the ARK Venture Fund, a closed-end interval fund, is invested in several promising private AI companies, including Replit, MosaicML, and Anthropic:

1. Replit: Replit is a contemporary, web-based coding platform featuring an embedded AI coding assistant utilized by millions of developers worldwide. The platform recently launched Bounty, a marketplace for coding projects. 
   1. Collaborative coding tools represent the next frontier following the success of Google Docs and Figma in writing and design. Replit's architecture, extensive language support, and thriving community position it strongly to lead the collaborative software development movement.
2. MosaicML: MosaicML offers infrastructure and software tools that enhance the efficiency of training large-scale AI models compared to traditional methods. CEO Naveen Rao, a serial entrepreneur, previously founded Nervana Systems, a deep learning startup acquired by Intel for $400 million in 2016. 
   1. Building on the success of the open-source MosaicML composer project, MosaicML Cloud simplifies resource orchestration complexity and applies various acceleration techniques to enhance neural network training efficiency.
   2. Positioned as an AI training software layer, MosaicML is poised to capture a significant share of AI compute spending. Notably, Databricks' acquisition of MosaicML in June represents a substantial return on investment since its addition to our Venture Fund in September 2022.
3. Anthropic: Anthropic, co-founded by Dario Amodei, former VP of Research at OpenAI, is an AI startup dedicated to research and the development of AI products with a primary focus on safety. 
   1. Its first product, Claude, is a versatile large language model designed with a strong emphasis on aligning the model's behavior to prevent misuse. While some companies may train their AI models using proprietary data, others are likely to leverage a combination of proprietary and third-party models. Anthropic's commitment to alignment positions it for success as a third-party model provider.

ARK’s AI Portfolio Strategy

Nvidia's recent stock rally has prompted ARK Investment Management to outline its portfolio strategy around AI, considering three key factors:

1. Productivity: Generative AI applications are significantly enhancing productivity in various industries. For example, large language models like GPT-4 are reducing the time required for software development by 55%, indicating potential productivity gains across different sectors.
2. AI Hardware Demand: The rise of generative AI necessitates substantial investments in AI-specific hardware. ARK's research predicts a significant increase in spending on AI-driven data centers, with an estimated rise of 53% annually, potentially benefiting chip manufacturers like Nvidia.
3. AI Software Pull-Through: ARK's analysis suggests that each dollar invested in AI hardware could yield up to $21 in software revenue over its lifespan. Companies with proprietary data, distribution advantages, and strong leadership are positioned to capitalize on the productivity improvements and new markets created by AI.

Overall, ARK anticipates that AI will dramatically enhance global productivity, particularly among knowledge workers, potentially reducing costs by nearly half on a wage base of $32 trillion by 2030.

However, ARK also highlights the competition Nvidia may face in the AI hardware market from companies like Advanced Micro Devices (NASDAQ: AMD), Amazon, Microsoft, Google, and specialized vertical integration strategies like Tesla's Dojo and Meta's MTIA. While Nvidia is expected to continue growing, these competitors could pose challenges not fully considered in financial industry models.

I’m keeping a close eye on these AI startups as I recognize their potential in transforming many aspects of our culture and economy. Whether you like it or not, these technology trends are only going to accelerate in the coming years and you don’t want to be left behind.

Chris Curl
Editor, Daily Profit Cycle