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It’s no secret that small investors have embraced Nvidia Corp. NVDA-Q in a big way, but their interest in the high-flying technology company doesn’t look like irrational hype. Well, not yet anyway.

Of course, there were some eye-popping moments on Thursday, the day after Nvidia released its latest quarterly financial results.

The share price jumped 16.4 per cent to a fresh record high. It closed at US$785.38, up US$110.66.

In a single day of trading, the company added some US$250-billion to its stock market value, driving the value of the chip maker above US$1.9-trillion. That marks the biggest one-day gain in market capitalization in Wall Street history, according to Reuters.

Beneath this apparent market ebullience are some outstanding performance figures that underscore Nvidia’s central role in supplying the advanced chips that are bringing generative artificial intelligence to data centres and across the business spectrum.

“Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations,” Jensen Huang, Nvidia’s chief executive officer, said in a statement.

It would be difficult to accuse Mr. Huang of exaggeration here. The company reported quarterly sales of US$22.1-billion, for year-over-year growth of 265 per cent. A year ago, when the commercial prospects of AI had begun to emerge after the successful release of OpenAI’s ChatGPT chatbot, Nvidia reported sales of nearly US$6.1-billion.

Profit growth was even more spectacular over this 12-month period, rising 765 per cent to US$4.93 a share.

This is no undiscovered gem, though. The share price has risen 58 per cent so far in 2024, raising some suspicions that trend-chasing investors are simply piling on to a winning stock.

There is certainly evidence that retail investors – who are saddled with the unfortunate reputation for poor market timing – are becoming obsessed with Nvidia and other tech superstars. Their interest is drawing comparisons to the dot-com bubble, which delivered big gains in the late 1990s before the bubble burst in 2000 and left many investors nursing losses.

Among Gen Z and Millennial-aged active investors using Toronto-Dominion Bank’s self-directed trading platform, the most popular stocks purchased last month were electric-vehicle maker Tesla Inc., cryptocurrency miner Marathon Digital Holdings Inc., Nvidia, rival semiconductor company Advanced Micro Devices Inc. and Canadian-based e-commerce operator Shopify Inc.

Although Tesla’s share price has been struggling recently, the other four stocks are up by an average of 184 per cent over the past 12 months, led by Nvidia’s 274-per-cent gain, suggesting that investors could be buying these stocks simply because rising prices are leaving much of the rest of the market in the dust.

Some investors are looking beyond Nvidia shares and turning to risky options as a way to score bigger, faster gains. Call options offer a bet on the share price rising, and can deliver massive gains – or losses – in a brief period.

Garrett DeSimone, head quantitative research at OptionMetrics, said retail investor activity in Nvidia options has been rising since the start of the year.

“There has been a trend in large OTM call buying in this stock during the AI mania,” Mr. DeSimone said in an e-mail, referring to particularly volatile out-of-the-money options that are leveraged to upside moves.

This looks like trouble. Yet, while it may be tempting to tsk-tsk small investors for betting on a hot trend and taking some outrageous risks, Nvidia – along with an AI boom that promises to boost productivity – is impressing even some professional market watchers.

“It’s hard to argue with success. Nvidia is enjoying monopoly power in a market that is hungry for its red-hot chips,” Ed Yardeni, chief investment strategist at Yardeni Research, said in a note.

The stock isn’t even ridiculously expensive, given the company’s outstanding profit growth.

Mr. Yardeni pointed out that Nvidia’s price-to-earnings ratio, based on estimated earnings, peaked at 84.2 last June. Prior to Thursday’s rally, the P/E was 34.2, which means that the share price hasn’t been keeping up with profit expectations.

Put another way, Nvidia’s subsiding valuation implies that investor expectations are becoming more grounded as the company’s earnings rise.

This, too, appears rational. Nvidia is now one of the most valuable companies in the world, based on the value of its outstanding shares. Size alone suggests that its growth over the next several years could be somewhat less spectacular than its growth over the past year.

The hope for latecomers to the Nvidia rally? The AI boom is just getting going as companies spend big bucks on transforming their businesses, delivering growth to Nvidia that can still deliver very strong gains.

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