Cathie Wood's Mistake Could Cost ARK Invest Everything

Arc invest has a huge problem I don't know whether it's the entire firm or Kathy would specifically but they will seemingly do anything to avoid investing in a certain kind of company highlighting these biases in other investors can help us see them in ourselves so I hope this episode challenges your thinking and maybe even makes you a little money on your own investing Journey your time is valuable so let's get right into it one of the most fatal mistakes any investor can make is having a bias against stocks that don't fit their personal narrative that said this video isn't about Kathy Wood just being wrong or about Arc invest being somehow bad I'm just using them as an example because Kathy Wood is always sharing her latest investment thesis in interviews but here's the thing Arc invest is already Limited in the stocks that they can buy because they manage thematic funds for example Kathy Wood can't just put Tesla stock into her genomics fund arcg even if she thinks it will outperform every other stock in that fund so it's strange to me that Kathy Woodward also avoid making big investments in mega cap companies even if they totally make sense as a part of her portfolios especially in her Flagship Innovation fund RK which can already have stocks from every other Arc Fund in it well about a week ago kathywood did an interview with Barons where she laid out exactly why she doesn't invest in most big tech companies so I've cut down this interview to just the relevant Parts edited out all of the ums and Oz and sped it up so that we have plenty of time to pick it apart together and speaking of saving time and money I'm going to let you in on a little secret between researching Investments and making these videos running this channel is like having two full-time jobs so I'm really obsessive when it comes to managing my time and my money factor is the Home Delivery meal service that ships delicious and healthy food right to your door every meal is always fresh 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channel alright let's get right into the Kathy Wood interview here's the first clip from Barons I want to get right to it I want to start off with some kind of big picture macro questions and then talk more about specific Holdings it seems like right now over the past few years we've been in this era of groups of stocks you've got Fang and now the Magnificent Seven and they seem to kind of come and go quickly what's your take on all that so if you look at what has happened to Arc after two very difficult years we don't own most of the Magnificent Seven we own Tesla in size but the others either not at all or partial positions in our Flagship strategy and we have been able through the second quarter we outperformed even the NASDAQ 100 which is dominated by those stocks now we're backing and filling now so we'll see what happens as we enter the end of the year I think interest rates moving up has given everyone pause and so they're running back to their benchmarks but I do think our outperformance in the first half and it was significant how performance suggested that maybe underneath the market is broadening out and that's a very healthy sign fascinating you mentioned uh the performance of Arc Innovation the ETF and to the Moon several years ago then came back down to earth hard up year-to-date strongly now backed off a little bit with the retreat this month what do you tell investors and do you sleep well at night I mean this is a roller coaster well we are a great diversification strategy if you want Diversified Innovation we just wrote a paper it's on arc- funds around artificial intelligence and how the market has rewarded Nvidia and Microsoft and left a lot of other stocks that are probably going to be bigger beneficiaries from this point on than Nvidia and Microsoft those are the stocks we're focused on Nvidia has been primarily Hardware historically by our estimates for every dollar of Hardware sold around this Innovation opportunity AI we think the software pull through will be on the order it depends on the estimate but somewhere between eight and twenty one dollars for every one dollar so we think of the market and and investors broadly are overlooking some massive AI opportunities in other stocks more software oriented so our KL performed the NASDAQ by about 15 percent from the start of the Year through the end of July going up by about 59 percent compared to the 44 up for the NASDAQ but just a couple weeks later the NASDAQ was beating RK by around 10 year to date an RK is still trying to close that Gap the problem here is that rk's management fee is 75 basis points which is almost four times higher than the triple Q's management fee of just 0.2 percent that difference in management fees can really add up over time and Kathy Wood is justifying that fee with three main points here which are filled with the big biases that I want to highlight one her funds are a portfolio diversification strategy focused on Innovation two that the market is rewarding Mega cap companies like Microsoft and Nvidia but completely ignoring much smaller companies that are even bigger beneficiaries of Ai and three The Arc tends to stay away from Hardware companies like Nvidia because for every one dollar of Hardware revenues AI could generate between eight and twenty one dollars in software revenues let's tackle these points in order if you look at ARC invest's family of funds they're actually highly correlated with each other meaning their prices all move together even though they're filled with very different stocks this is especially true for their next Generation internet ETF Arc W The fintech Innovation fund Arc F and their Flagship Innovation fund RK all of which actually have a pretty good amount of overlapping Holdings but the reason for this High correlation is actually that most of the companies inside arcs funds are small high-tech growth companies with little or no earnings and free cash flows these are the exact kinds of companies that get discounted the most when interest rates are high which is why they all move together even though they're completely different businesses instead These funds are actually different flavors of the same strategy which is to diverse away from the S P 500 and the NASDAQ and that's a problem because Apple Microsoft Google Nvidia meta platforms and Amazon are the exact companies that have been performing well all year according to our convet's own research these six companies are responsible for 70 percent of the nasdaq's year-to-date run-up of almost 40 percent and Arc invest does care about performance since they expect every single stock they buy to grow at a 15 compound annual growth rate or roughly double every five years all these Mega caps are easily clearing that growth rate today so why is Kathy Wood flat out refusing to have big positions in any of them well here's how she responded to that exact criticism I want to follow up and ask about Nvidia but just one more question about the fund and your work you know people criticize you sometimes Kathy and I'm wondering do you read that stuff do you does it get you down or do you just keep carrying on with your work so my experience with truly disruptive innovation is the Old Guard and the Old Guard are the names that have reached very high levels in many of the benchmarks that they dismiss these Technologies which are simply nipping at their heels and you know we can talk about Zoom for example complete dismissal of Zoom as an AI opportunity and so you know Microsoft just dominates there's no way Zoom can can go anywhere well I remember Eric Juan when he started WebEx at that time Cisco which nobody could be Cisco it was being treated like Nvidia is today Cisco was developing I forget how much they cost maybe a half a million dollars these video consoles that would populate an entire room and do what WebEx ultimately did for a much lower price and of course Cisco bought WebEx well Eric Yuan founded Zoom understanding that enter prize Communications was going to shift from on-prem hardware-centric to the cloud and you know it is now selling at roughly eight times this year's ebitda and is a real Value stock just wait until they start showing their AI chops and we think that will start with zoomtopia in early October this is where Kathy Woods deep bias against big Tech is really showing this isn't the.com bubble era saying that the Old Guard is somehow dismissing these disruptive Technologies makes absolutely no sense the reason that Microsoft is dominating is exactly because it's not dismissing the most disruptive Innovations out there right now like large language models Microsoft owns 49 of open Ai and they don't just own it they're integrating gpt4 in virtually every Microsoft product as Ai co-pilots and doubling down on providing AI infrastructure with Azure not only that but Microsoft isn't ignoring business communication software companies like zoom and slack either they're directly competing with both of these products with Microsoft teams Microsoft teams is the third largest video calling platform on the market behind zoom and Google me by the way Google meet grew their overall market share by a whopping 10 last year but I guess Google meet doesn't count since Google is another Mega cap company here's another Point Microsoft is currently working on moving their whole Windows operating system to the cloud because they see the same Trend that Kathy Wood is talking about which is more and more compute power moving away from Individual workstations and towards cloud services if Windows becomes a cloud service then Microsoft can integrate Windows AI co-pilots much more deeply into the operating system and their apps without having to worry about all the different configurations and specifications that at-home PCS and laptops can have isn't that exactly taking a tried and true piece of software and innovating on it so I'm not really sure how they can justify not holding Microsoft which has also outperformed RK year-to-date but it's not just Microsoft listen to Kathy Woods justifications for not holding Nvidia by the way nvidia's stock has returned more than all of Arc invest funds combined so far this year I want to go back to Nvidia because a lot of people are just discovering that company and they would consider a disrupter but it sounds like you're almost considering them an incumbent a legacy company or is it just a valuation problem would you get back into the stock at some point Kathy right so our we took our initial position when we started the firm and it when it was five dollars on a split adjusted basis and we wrote it all the way up and we still own it in our more specialized portfolios but at a much lower rate why because we're very sensitive to valuation contrary to what many people might think and according to our estimates and our estimates for NVIDIA are quite aggressive in terms of Revenue growth over the next five years we think they're in a beautiful position with the picks and shovels but everyone knows it everyone knows it and it is valued accordingly so on this year's Revenue it is somewhere where in let's say the 25 to 27 times sales range depending on one's estimate and we have other names in the portfolio on the software side and remember for every dollar of Hardware you know eight to twenty one dollars of software are going to be pulled through according to our estimates Tesla is the biggest AI opportunity out there it is the biggest artificial intelligence project in the world when it comes to autonomous taxi platforms and it is selling for roughly I think it's seven times maybe it's six times revenues now we think that's the best example but other software plays would include twilio which is selling it two to three times Zoom which is selling at roughly three times sales these are all sales and these companies have either very high gross margins like Zoom eighty percent or they have low gross margins now like Tesla does in the 20s these are gross margins but they will be rising because of this SAS like model that is evolving for Tesla they will rise from the 20s into what we believe is the 50s and 60s not at all expected out there so Arc invest prefers software companies to Hardware companies since they predict between 8 and 21 of AI software revenue for every one dollar of Hardware revenue and the biggest AI opportunity out there right now is Tesla even though 85 percent of Tesla's revenues come from selling cars at 18.2 percent gross margins and yes I know that the plan is to eventually drive those margins way up by selling full self-driving software to Tesla owners and AI Training Services to other companies through dojo and eventually humanoid robots to do everything else I'm not saying that investors shouldn't price those things into Tesla stock right now but don't you think it's a little weird to consider those things for Tesla but totally not consider the robots and software services and applications that Nvidia has built on top of their Hardware all of which are already being used across a wide variety of Industries today and isn't it a little strange to talk about how Tesla's software and service models will move them from 20 margins today to 50 margins in the future while discounting the fact that Nvidia is selling their AI data center chips at 70 margins right now even if the argument is that these margins aren't sustainable wouldn't they be if you priced in their future software revenues after all Nvidia showed us that they think Enterprise software is just as big of an opportunity for them as their Hardware business is today not to mention that Nvidia guided for even higher margins next quarter so there's no real competition to their Hardware just yet if a lack of competition is a major argument for investing in Tesla then why doesn't it also apply to Nvidia even the valuation argument doesn't really make sense even though nvidia's price has more than tripled over the last year their net income and their earnings per share are up by almost 9x so their price to earnings ratio has gone way down over that time frame look my point isn't to pick apart every little thing that Kathy Wood said in this interview it's to help you avoid making a fatal investing Mistake by sharing some clear examples of what I feel are unfair comparisons and justifications with data and context to back it up if you're a Tesla investor who thinks they have a bright future in AI software and services you should at least acknowledge other AI software and service companies especially outside the automotive Market same thing with palantir it's totally fine to have a favorite stock that you really believe in and want to load up on just make sure it's because you're making Apples to Apples comparisons based on real metrics and Market data or else you could miss some pretty big Winners just because they don't fit your narrative let me know what you think in the comments below I'm excited to hear your thoughts and if you feel I've earned it consider hitting the like button and subscribing to the channel that lets me know to put out more content like this either way thanks for watching and until next time this is ticker symbolu my name is Alex reminding you that the best investment you can make is in you

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Keywords: ARK Invest, Cathie Wood, arkk, arkk etf, growth stocks, tech stocks, stocks, ticker symbol you, nvidia, nvda, nvidia stock, nvda stock, nvidia gtc 2023, jensen huang, nvidia keynote, openai, chatgpt, gpt4, msft, microsoft stock, msft stock, goog, googl, goog stock, google stock, nvidia stock news, semiconductor stocks, tsmc, tsm stock, asml, asml stock, gpt-4, stable diffusion, nvidia news, nvidia 2023, ai copilot, gpt5, nvda stock news, tsla, nvidia earnings, nvda earnings

Id: AQ0_c-hz9kE

Length: 15min 53sec (953 seconds)

Published: Thu Aug 31 2023