Nvidia’s return to China sparks new battle over AI power

Key Concepts

• AI Hype vs. Reality: The discussion centers on whether the current excitement around Artificial Intelligence (AI) constitutes a bubble or a genuine technological revolution.
• Internet Time Analogy: Comparing the current AI phase to specific historical periods of the internet's development to gauge its maturity and potential.
• Data Center Buildout: The massive investment in data centers as a key indicator of AI's infrastructure needs and growth.
• Geopolitical Impact on Tech: The influence of US-China relations and trade policies on technology companies, particularly in chip manufacturing and sales.
• Investment Strategies: Cathie Wood's approach to portfolio management, including taking profits, reallocating capital, and identifying long-term growth opportunities.
• AI's Transformative Potential in Healthcare: How AI is expected to revolutionize drug discovery, diagnostics, and patient care.
• Gold vs. Bitcoin: Analyzing the differing roles and performance drivers of gold and Bitcoin as investment assets.
• Productivity Boom: The expectation of a significant increase in economic productivity driven by AI.

AI and the Stock Market: Bubble or Revolution?

Cathie Wood, CEO of ARK Invest, addresses concerns about a potential AI bubble, stating that the current situation is "nothing like" the late 1990s dot-com bubble. She contrasts the current environment with the late 90s, where companies were valued highly despite significant losses, a phenomenon she argues is not happening today. Wood believes there is a "wall of worry" surrounding AI, with the hype being a significant part of it. She uses an analogy of "internet time," placing the current AI phase in the equivalent of 1959, but progressing at "twice the speed" of the internet's development. She anticipates that by 2026, it will be the equivalent of 1997, a period of "very good years" for the internet trade.

Data Centers and Geopolitical Trade Policies

The conversation touches upon the massive investment in data centers, with Wood acknowledging that she has discussed this with figures like Jensen Huang and Jamie Dimon. A significant portion of the discussion revolves around US-China trade policies and their impact on technology companies. Wood expresses her hope for a return to policies that would allow US companies to compete in the Chinese market. She cites the example of NVIDIA, which she claims went from a 95% market share in China to 0% after the administration's policies were implemented, stating these policies "backfired." She advocates for reverting to policies similar to the Trump administration to regain market access.

Regarding President Trump's potential green-lighting of selling H-200 chips to China, Wood's reaction is nuanced. She acknowledges that China is making progressive advancements, particularly in open-source software, where they are "probably number one now." She attributes this to US software companies ceasing sales to China due to fears of intellectual property theft, which pushed China towards open-source solutions. Wood states, "I love open source software. I think that this is the right decision to allow NVIDIA chips back into China."

When questioned about national security risks, specifically the People's Liberation Army using these chips for military purposes, Wood agrees that it is a risk. However, she expresses confidence that the US government will be vigilant in managing this risk, acknowledging that "all technology can be used for nefarious purposes."

ARK Invest's Investment Strategy and Portfolio Adjustments

Wood discusses ARK Invest's recent notable shifts in their portfolio. They have cut $15.8 million of Meta shares and are reducing their holdings in Tesla, which remains a top holding. Conversely, they are adding to NVIDIA and Google. She explains that these trades are all AI-related. Wood reiterates her belief that the fear of a hype phase ending badly is premature, comparing the current stage to 1995. She points to "end capital spending indicators" and macro indicators, noting five solid years of capital spending contributing to US GDP, and believes they are at the "beginning of that" for the AI age.

Regarding Meta, Wood anticipates its return on invested capital will decline due to aggressive investment in the AI age, leading to margin compression. For Tesla, she describes it as being at the "top of the range" and that taking profits is a "tactical move." She notes that Tesla has been in a five-year range and that while a breakout is possible, they are taking some off the top and waiting to see if volatility emerges, which is a "normal course of action."

AI's Impact on Healthcare and Biotech

Wood highlights the genome space and biotech as areas of interest. She believes AI is "permeating every sector" and blurring lines between industries. While autonomous mobility (robo-taxis, humanoid robots) is a significant application, she considers healthcare to be the "most profound application." She notes that companies like those in her flagship ARKK fund have struggled because the convergence of healthcare and technology is "convulsing to healthcare analysts." These analysts are often uncomfortable with fast-moving technology and regulatory/political complexities, leading to what she sees as "very inefficiently priced" opportunities in areas like AI therapeutics, gene editing, and curing diseases.

She elaborates on the impact of AI on healthcare, outlining three major ways:

1. Reduced R&D Costs: The cost of research, discovery, and development, which currently stands at around $600 million, is expected to fall significantly, potentially by four times, within five to ten years.
2. Transformative Diagnostics: AI will enable disease diagnosis through blood tests, including cancer at Stage 1 or even before, as polyps and tumors shed into the blood.
3. Curing Disease: AI will accelerate therapies like gene editing, leading to a shift from a "sick care" period (where 80% of dollars are spent) to a "preventive care and wellness" period.

Gold and Bitcoin: Shifting Dynamics

Wood discusses the performance of gold and Bitcoin. Gold has performed exceptionally well, up nearly 60% for the year, while Bitcoin has been more volatile, down 20% in the last three months. She predicts that this dynamic could flip next year, with gold facing downside risks and Bitcoin poised to outperform.

She characterizes Bitcoin as behaving more like a "risk-on asset," having played that role during various crises. She believes Bitcoin is "climbing another wall of worry" due to its four-year cycle. While historically Bitcoin has seen significant drops (735% to 90%), its volatility is decreasing. She suggests that institutionalization into new asset classes will prevent further substantial declines, and the low may have occurred a couple of weeks ago.

Conversely, gold is seen as a "risk-off asset." Its rise is interpreted as evidence of investors using it as a hedge against geopolitical risk, reflecting the "wall of worry." Wood draws a parallel to the period from the early 1980s to the late 1990s, when gold declined during a "golden age for innovation" culminating in the internet. She anticipates a similar scenario where gold may decline as the AI age progresses.

Outlook for the New Year

Wood expresses a bullish outlook for the new year, intending to increase exposure to AI. Despite her reservations about Meta's valuation due to return on invested capital issues, she believes the US is moving from a "rolling recession" (manufacturing negative for three years) into a "rolling recovery" and then into a "productivity-driven boom" of unprecedented scale. She credits AI as a significant driver of this expected productivity boom.

Conclusion

Cathie Wood's perspective is that the current AI revolution is in its early stages, comparable to the nascent phases of the internet, and is poised to drive significant economic growth and productivity gains. While acknowledging the "wall of worry" and potential tactical adjustments in portfolio management, her core conviction remains in the transformative power of AI across various sectors, particularly healthcare. She also foresees a shift in the performance dynamics between gold and Bitcoin, with Bitcoin expected to outperform as institutional adoption increases and AI drives a new era of productivity.