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The AI revolution is here, and it’s already disrupting every industry. Investors looking to capitalize on this seismic shift will need to act quickly, as many AI-focused stocks are already overvalued. That’s according to Cathie Wood, founder and CEO of Ark Invest, who shocked markets recently by dumping Nvidia shares.

Wood believes Nvidia’s meteoric rise has made it overpriced, so she’s pivoting to smaller AI players with big potential. For stock pickers hoping to find the next Nvidia before valuations go stratospheric, it pays to follow the moves of investing gurus like Wood. Her Ark Invest is laser-focused on disruptive innovation, especially in AI, crypto and genomics.

In an interview with Benzinga CEO Jason Raznick, Wood explained her AI investing strategy. She targets companies with “proprietary data, domain expertise in their own business, as well as AI expertise.” This combination allows businesses to gain a competitive edge as AI transforms their industries.

While tech titans like Apple, Microsoft and Alphabet are poised to expand their AI capabilities even further, Wood believes their markets are becoming saturated. That’s why she advocates looking beyond mega-caps to find small-cap AI innovators on the verge of explosive growth.

Her recent selling of Nvidia proves this point. Ark Invest has dumped around 90% of its Nvidia holdings over the past year, shedding 1.3 million shares in October 2022 and nearly 400,000 more through May 2023. Just after Nvidia’s blockbuster earnings release, Ark sold another 2,230 shares worth over $1 million due to the “overvalued” valuation.

Wood explained her rationale in a tweet, writing: “In 2014, most investors considered $NVDA, priced at ~$5, simply a PC gaming chip stock. In contrast, @ARKInvest’s first principles research pointed to #Nvidia as the premier equity play on #AI. Now up ~80-fold, investors seem to think NVDA is the only AI play. It is not!”

So if Nvidia is tapped out, where is Wood investing for the AI-first future? Here are her top 3 AI stock picks beyond Tesla, which she still wholeheartedly supports:

UiPath (PATH) — The Robotic Process Automation Leader

At the forefront of Wood’s AI portfolio is UiPath, a robotic process automation leader. UiPath software uses AI and machine learning to automate routine business processes like data entry, accounting, HR tasks and customer service interactions.

ARK Invest ETFs have accumulated massive UiPath holdings, with its ARKK Innovation ETF and ARKW Next Generation Internet ETF allocating 5.76% and 4.74% respectively to the stock. UiPath also ranks among the top 10 assets for Ark’s ARKF Fintech Innovation ETF, ARKQ Autonomous Technology & Robotics ETF and ARKX Space Exploration ETF.

Ark’s analyst Simon Barnett is extremely bullish on UiPath’s prospects. He projects the RPA software market ballooning to $60 billion by 2026, up from just $2 billion in 2019. UiPath currently dominates with a market share above 50%, and Barnett believes it can capture even greater share as RPA becomes a must-have enterprise solution.

According to Ark, “UiPath’s emphasis on low-code no-code interfaces emphasizes flexibility, scalability and ease.” This allows the platform to automate processes that involve human judgement, not just routine digital tasks. UiPath is already entrenched in the majority of Fortune 500 companies, and its innovative product makes it the clear RPA leader in a booming, AI-driven market.

Twilio (TWLO) — Cloud Communications Infrastructure for the AI Applications of Tomorrow

A core AI stock holding for Ark is Twilio, a cloud engagement platform that enables companies to communicate with customers across voice, messaging, video and email channels. Twilio’s APIs allow developers to easily integrate feature-rich communication capabilities into their apps.

Ark believes Twilio is “poised to power modern enterprise-to-customer communications as mobile phone adoption grows globally.” As AI chatbots and virtual assistants transform customer service, Twilio provides the cloud infrastructure needed to scale automated, personalized engagement.

The company recently posted strong Q2 results, including 64% revenue growth, which prompted Twilio to boost its full-year earnings outlook. Revenue is now projected at $3.79 billion to $3.81 billion.

Wood has long-term conviction in Twilio’s opportunity. Even after the post-earnings pop sent shares soaring 15%, Ark Invest bought the dip by acquiring another 68,300 TWLO shares in early August. With mobile penetration expanding globally and AI set to revolutionize communication, Twilio looks to be a long-term winner.

MosaicML — The Key to More Efficient AI Model Training

MosaicML is Wood’s moonshot AI bet — a startup aiming to make training AI models more efficient. Founded by machine learning pioneer Naveen Rao, MosaicML has developed a software solution to cut the cost and time required for AI training.

This allows companies to experiment faster and reduce compute costs, enabling more access to cutting-edge AI. Ark believes “MosaicML is likely to capture a significant share of AI compute spend” as demand for machine learning models skyrockets.

Wood’s conviction paid off in a big way, as Databricks just acquired MosaicML for $1.6 billion in June. Ark was the first institutional investor in MosaicML, taking a stake in September 2022 through its Ark Venture Fund. The acquisition delivered a 5x return in less than a year.

With data as the fuel for AI, MosaicML is bringing predictive analytics and automation to more businesses across industries like retail, finance and healthcare. The platform makes it simple for companies to deploy and manage ML models efficiently at scale.

After hitting a grand slam with MosaicML, expect Cathie Wood to continue hunting for potential AI unicorns before they enter the mainstream. She has proven adept at identifying emerging tech trends long before the street catches on.

Investors hoping to tap into the seismic potential of AI should track Ark’s holdings and keep an eye out for compelling small-cap plays. While Nvidia may have run too hot to justify its lofty valuation, the AI revolution has only just begun.

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