Ark Invest famously sold off the bulk of its holdings in semiconductor giant Nvidia (NVDA) -) weeks before the company skyrocketed in value after reporting a record first-quarter earnings. Nvidia's earnings record has continued throughout the year as it has cemented itself as one of the largest companies by market cap in the world.
But Cathie Wood, the CEO and investment lead of Ark Invest, does not regret gutting her firm's exposure to the AI darling. Though some of Ark's more specialized funds do maintain some level of exposure to Nvidia, Wood noted that Ark has cut its Nvidia holdings everywhere, and what she called "portfolio management."
Related: Elon Musk makes a big move to compete with Jeff Bezos' Amazon
Speaking to CNBC Monday, Wood contended that shares of Nvidia, trading at around $458, look much more expensive than shares of Tesla (TSLA) -), currently trading at $254. The reason has to do with the potential upside.
Over the next five years — Ark's investment horizon — Wood thinks that Tesla has significantly more value to offer in the way of "upside surprises" compared to the chipmakers. Wood said the reason many analysts are looking at Tesla as a more expensive purchase than Nvidia has to do with autonomous driving.
Other analysts aren't sure about the value of autonomy. But Wood and Ark Invest are convinced that Tesla's pending success in self-driving cars will allow the company to build out a platform to dominate the nascent autonomous taxi market.
Wood sees "incredible revenue and margin expansion" around the potential of the autonomous Tesla.
It is around this idea of margin expansion that Wood sees more upside in Tesla than Nvidia. Where Nvidia's gross margins are already quite high, pegged at around 71% as of August, Tesla's gross margins, currently below 20% and expected to fall further amid the company's ongoing price cuts, have much more room to grow.
Wood thinks that the advent of autonomous driving during that specified time horizon will allow Tesla to scale its margins "into the 60s and 70s."
"We think that a lot of people understand how important Nvidia is in this ecosystem and they do not understand how much each dollar of hardware spent is going to pull software through," Wood said. "We think it's on the order of 20 times."
Related: Cathie Wood net worth: Why the Ark Invest CEO is an investor to watch
And Tesla, according to Wood, Wedbush's Dan Ives and Morgan Stanley's Adam Jonas, ought to be considered a tech and software company first and a car company second.
"Tesla, or autonomous driving, we think is the biggest AI project in the world," Wood said.
Ark Invest in April projected that Tesla will be trading at $2,000 a share by 2027, an increase of roughly 10 times its current value. During last quarter's conference call, Tesla Chief Elon Musk said that he sees a pathway for Tesla to see that 10 times increase in market value.
Tesla is set to report third-quarter earnings Oct. 18.
Action Alerts PLUS offers expert portfolio guidance to help you make informed investing decisions. Sign up now.
