Cathie Wood of Ark Invest says Nvidia valuations are too high and explains why she sold her shares

Cathie Wood, the founder of Ark Invest, is known for taking bold risks on new tech companies. She recently explained why she exited Nvidia earlier this year. On May 24th, Nvidia’s stock jumped more than 20% in a single day, bringing it closer to the $400 level. However, in tweets on May 29th, Wood justified her decision to exit the stock, stating that the world’s most valuable chipmaker has been priced “ahead of the curve.”

Earlier this year, in January 2023, the Ark Innovation ETF fund exited from Nvidia. Since then, the stock has more than doubled and is close to hitting a $1 trillion valuation. However, Wood noted that Nvidia’s stock is trading 25 times higher than the estimated sales for the current financial year, as investor enthusiasm spikes over Nvidia’s push in the AI industry. This is six times higher than its peers on the Philadelphia Semiconductor Index and 12 times higher than that of Microsoft Corp.

Despite the fact that Nvidia’s stock has been trading at a premium since the pandemic, the gap looks more pronounced after the strong price surge this year. Some analysts believe that the outlook for chips isn’t quite picking up yet amid the tepid demand for consumer electronics.

According to SMBC Nikko Securities Inc analysts, including Takeru Hanaya, “Recent results at Nvidia have heightened expectations for AI servers. Still, there is a contrast between AI expectations and overall market weakness, demonstrated by inventory adjustments and ongoing price cuts in the chip industry.”

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Nvidia’s Push in the AI Space

Jensen Huang, who co-founded Nvidia in 1993, is still running the company. Over the years, Nvidia has made a name for itself as the leading chip manufacturer while catering to different industrial requirements of gaming, cloud computing, etc.

At the Computex trade show on May 29th, Huang unveiled a number of AI products across new robotics design, gaming capabilities, advertising services, and networking technology. Furthermore, Huang also unveiled Nvidia’s AI supercomputer platform called DGX GH200 which will help tech companies to create successors to the popular platform ChatGPT. In a note to investors, independent analyst William Keating wrote, “We basically feel that Nvidia’s stock is in bubble territory, regardless of the future potential growth. In other words, we think the train has left the station and we see little point in chasing it down the tunnel at this stage.”

Based on how much cash Nvidia generates, the company is far more expensive than its peers. Nvidia’s cash flow valuation is over 140 times, surpassing its peers Advanced Micro Devices Inc. and Monolithic Power Systems Inc., which have cash flow valuations less than half of Nvidia’s.