Ark Invest founder questions Nvidia and Arm Holdings valuations amid AI focus

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Cathie Wood, founder of Ark Invest, has recently expressed reservations about the valuations of Nvidia (NASDAQ:NVDA) and Arm Holdings (NASDAQ:ARM), despite Nvidia's presence in Ark's portfolio. This year, Wood significantly reduced Ark's stake in Nvidia due to concerns about overvaluation.

Wood discussed her investment strategy on CNBC's Squawk Box Europe program, particularly focusing on artificial intelligence (AI). She hinted at a potential overemphasis on AI within a certain chip stock, which was not Nvidia.

Arm Holdings, which had its initial public offering (IPO) last week, is the company Wood believes is overrated for AI. The firm was taken private by SoftBank (TYO:9984) in 2016 for $32 billion and after approximately seven years, it decided to go public again.

The IPO for Arm Holdings initially brought in substantial profits with share prices soaring nearly 25% on the first day of trading on September 14. However, Arm's stock has since dropped close to 20%.

During her Squawk Box Europe interview, Wood voiced two main reservations about Arm. Firstly, she expressed concerns about the company's high valuation, similar to her apprehensions about Nvidia. Secondly, she questioned whether Arm's growth prospects are as promising as some might believe. Despite dominating the smartphone chip market, Arm has yet to make significant strides in AI.

However, Wood clarified that her criticisms were not aimed at AI as a whole. She remains confident in the immense potential of AI and believes that innovation in this field is undervalued considering the opportunities it presents.

Wood also highlighted that her funds own lower-priced names with more exposure to AI than Arm. In addition to focusing on U.S. companies, Ark is also considering global opportunities as technology costs decrease due to advancements in AI.

A review of Ark Invest's portfolio across all its exchange-traded funds reinforces Wood's faith in AI, with two of Ark's top three holdings, Tesla (NASDAQ:TSLA) and UiPath, being AI stocks.

Even after its post-IPO decline, Arm's stock trades at more than 55x forward earnings, surpassing Nvidia's forward earnings multiple of nearly 40x. This overvaluation and the overestimation of Arm's AI prospects raises questions about Wood's accuracy.

Arm's AI prospects present two different narratives. In the short term, it seems unlikely that AI will significantly boost Arm. Currently, data centers, where Nvidia's chips are prevalent, are the primary growth area for AI. However, in the long term (beyond five years), it is plausible that AI processing could shift more towards mobile devices, potentially making Arm a significant player in AI.

Wood remains optimistic about the future of AI technology and suggests that investors with a long-term perspective should place more emphasis on AI.

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