Missed Chances: Don’t ask star fund manager Cathie Wood about Nvidia, or TSMC

for the first time in more than two years, thus missing out on the foundry’s recent melt-up as well.

Perhaps to defend her losses, the founder of Ark Investment Management has been sounding the alarm on chip stocks lately. She warned that a lack of explosion in software revenue will slow companies’ AI infrastructure spending and that the lead time for Nvidia’s graphic processing units was already coming down. And unlike dot-com era market darling Cisco Systems Inc, Nvidia could face intense competition. Elon Musk’s Tesla Inc, for one, is designing its own chips, she said. Ark has been purchasing the EV maker’s beaten-down stock lately.

Given her track record, one has to take Wood’s comments with a grain of salt. Among providers of mutual and exchange-traded funds, Ark topped the chart in wealth destruction. Its family of ETFs, which managed around $16 billion as of 2023, wiped out $14.3 billion in shareholder value in the past decade, according to Morningstar Inc.

Her caution nonetheless resonates with those who worry we are nearing another dot-com burst. Positioning among AI winners is getting crowded. In the fourth quarter, hedge funds increased their Nvidia holdings by $2 billion, as the likes of Rokos Capital Management and Bridgewater Associates chased after the GPU chip designer’s scorching rally.

Like the 1990s tech bubble or the Nifty Fifty optimism of the early 1970s, today’s market leader, Nvidia, is characterized by a soaring profit outlook. Notably, all of Nvidia’s price gains have been attributable to a higher stream of earnings, with its price-to-forward-earnings multiple largely unchanged since the start of 2023. But according to Goldman Sachs Group Inc., there’s one key difference. Nvidia has much higher profit margin and return on equity, which might just support its future earnings better.

Meanwhile,trading in TSMC spiked up this year, with the stock gaining 11% this month alone. Foreigners are purchasing equities in Taiwan again, where TSMC is the crown jewel, despite geopolitical tensions between China and the US over the island.

This is perhaps a sign that the AI rally is broadening. In recent weeks, investors are diversifying away from Nvidia and identifying new AI beneficiaries. It’s a healthy development.

According to Goldman, here are possibly four phases in this AI trade. On center stage, of course, is Nvidia, which has returned 500% since the start of 2023 and has become overly popular. Phase two will likely focus on companies involved in the infrastructure needed for AI. Chip manufacturer TSMC and designer Arm Holdings Plc naturally come to mind. Next are firms that can incorporate AI in product offerings to boost revenues, such as Meta Platforms Inc, or what Apple Inc is trying to do with artificial intelligence engine Gemini from Alphabet Inc.’s Google.

Already, we are seeing a catch-up trade in the next two phases that Goldman described. However, unlike Nvidia, much of TSMC’s share gain is driven by a rise in valuation, rather than earnings. OpenAI CEO Sam Altman’s wildly ambitious and unrealistic attempt to raise trillions of dollars to boost the world’s chip-building capacity reminded investors that the Taiwanese foundry has an enviable business.

As such, there are a couple of things investors can watch out for. They need to be vigilant in testing Nvidia’s profit sustainability. For instance, in the fourth quarter, 36% of S&P 500 companies mentioned AI during their earnings call. Will we see similar enthusiasm and corporate infrastructure spending during the upcoming earnings season? As for TSMC, is its re-rating well-deserved?

As I’ve written in the past, Cathie Wood is a star fund manager not because of her portfolio returns, but because she tosses out interesting ideas. Once again, her comments are prompting us to unpack this AI rally and discern the subtle shifts in market dynamics. In this sense, her voice remains relevant and important, even though her advice might not be.

Shuli Ren is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.