Nvidia Warning: What’s Behind Cathie Wood’s Surprising Sale of NVDA Stock?

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Everybody likes Nvidia (NASDAQ:NVDA) stock now – well, maybe not literally everybody.

Nvidia’s position as a premier manufacturer of chips for artificial intelligence applications is notable. However, if the market is truly efficient, then the Nvidia share price should already reflect the company’s niche-market dominance.

Besides, just consider the terrible resolution of the tech-stock bubble of the early 2000s. Back then, internet companies were all the rage. In 2023, it’s all about AI and Nvidia is considered the market darling that can do no wrong.

It’s dangerous for sentiment to be so optimistic about a particular market sector and, in this case, one specific company. And, as we’ll discuss in a moment, even a famous fund manager that usually favors expensive stocks recently sold NVDA stock because of valuation concerns.

Why the Market Is so Obsessed With Nvidia

There are several companies jumping on the machine learning bandwagon now by producing generative AI software. In contrast, Nvidia produces graphics processing unit chips that can provide the intense computing needs of AI applications.

Thus, NVDA stock looks like the perfect picks-and-shovels play for the machine learning revolution. It’s indisputable that Nvidia is America’s top AI chip manufacturer.

According to Barron’s, Bank of America Global Research analysts “estimated that Nvidia accounts for about 75% of the AI semiconductor market.” Meanwhile, Mizuho Securities analyst Vijay Rakesh figures that Nvidia is “in line to generate around $300 billion in AI-specific revenue in 2027.”

Cathie Wood Sells NVDA Stock

All of this glowing commentary about Nvidia sounds great, right? Here’s the problem, though. The financial markets are highly efficient; by the time you hear analysts praising Nvidia’s AI chip market leadership, it’s already been priced into the shares.

This line of reasoning, it seems, prompted Cathie Wood, who heads ARK Investment Management, to sell her entire position in NVDA stock. Or more accurately, Wood said that her “flagship fund” (presumably, the ARK Innovation ETF (NYSEARCA:ARKK)) “no longer owns the stock.”

That’s surprising, since Wood is known for buying richly valued shares of technology companies. Yet, Wood dispelled the myth that she doesn’t care about stock valuations:

“For people who don’t think that we pay any attention to valuation, it was valuation that got us to take it down,” she said. “Nvidia is selling at a very high multiple of revenue right now.”

I tend to agree. Nvidia has a trailing 12-month price-to-earnings (P/E) ratio of 244.76x. Thus, it appears that at least several years’ worth of earnings potential has already been priced into NVDA stock.

NVDA Stock: Take the Money and Run

I’ve already sounded the alarm about Nvidia, and I’m standing by my against-the-grain warning. Wood, of all people, is taking profits on her Nvidia share position, and I can’t blame her at all.

Therefore, I recommend taking profits on NVDA stock if you have any, and waiting for the share price to come down. Nvidia is a great company in a fast-growing niche market. However, investors already know this.

Ultimately, expensive stocks will be the most vulnerable ones when the next major market rotation occurs. So, be cautious – not greedy – if you’re thinking about investing in Nvidia now.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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