Experiencing Nvidia FOMO? You’ve got two choices

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At the start of the year, there was a growing sense among the stock market commentariat that Nvidia Corp.’s NVDA-Q winning streak was getting a little overextended.

At that point, the company’s shares had more than tripled over the previous year and it looked richly priced. Caution was probably warranted.

Since then, the stock has risen another 85 per cent, adding US$1-trillion to its market value in less than three months.

Nvidia has become a stock market unto itself – the near-singular repository for the hottest investing theme in the world.

Fear of missing out on the artificial intelligence revolution has engulfed the retail investing populace. What to do if you are one of those investors on the sidelines of this movement? You are probably grappling with some powerful FOMO.

Two options. Accept that you missed this one. Can’t win ‘em all. This way, you can at least look like a genius if the whole AI frenzy collapses in on itself. Plus, if you own any U.S. index products, you already have some measure of direct exposure to Nvidia, which has a 5 per cent weighting in the S&P 500 index.

The other route is to buy into the hype. There are plenty of credible market observers who say that it is not too late to get on the Nvidia bandwagon. But if you climb aboard, you ought to understand the risks.

The natural cautionary parallel to draw to this moment is the dot-com bubble. There are certainly some similarities.

When the bubble burst in the early 2000s, the pain was largely inflicted on a generation of Canadian investors through Nortel Networks Corp. Fundamentally, Nvidia is nothing like Nortel, which now serves as a case study in financial mismanagement.

Where the two converge is in their meteoric popular profiles. Nvidia, like Nortel, has transcended the confines of financial markets to become a cultural force.

Earlier this week, Nvidia chief executive officer Jensen Huang had a rock star moment in front of a stadium crowd of 15,000 fans in San Diego, at an event dubbed “AI Woodstock,” where he unveiled a new chip the company says will usher in a “new era of computing.”

Those chips add to the company’s near-insurmountable lead in AI, said Kim Bolton, the president of Toronto-based hedge fund Black Swan Dexteritas.

“It’s not only computational power, Nvidia has expanded its addressable market to things like autonomous vehicles, the metaverse and to so many different industries, from health care, to finance, to cybersecurity,” Mr. Bolton said.

“Once in a blue moon, a company like this comes along, and everyone needs to own it.”

Nvidia exceptionalism is not without merit. Its last earnings result alone lent credence to the belief that the company is in the early stages of something extraordinary.

For the other six members of the Magnificent Seven stocks, fourth quarter revenue growth ranged from 2 per cent to 25 per cent, year over year. Nvidia’s sales, on the other hand, rose by 265 per cent. Companies of that size simply do not grow that fast.

In the month since that earnings release, the stock has gone parabolic – spiking by another 35 per cent – while the company’s cheerleaders have struggled for the right superlatives.

On CNBC last month, Trivariate Research CEO Adam Parker spoke of an “inherent arrogance” to taking a pass on Nvidia. “If you don’t own it, what you’re saying is you’re God.”

To the skeptic, that will sound an awful lot like the kind of exuberant sentiment that characterizes asset bubbles.

When a trade becomes so heavily one-sided, it gives rise to dangers separate from company fundamentals.

“The companies themselves aren’t the big risk. It’s the investors,” said Ron Shuttleworth, a veteran tech investor and partner at Toronto-based Oak Hill Financial.

The tech mania of last century spawned a vast ecosystem of startups with huge valuations and little to support them. With AI, it’s different. It requires such enormous resources to make it function, that only large, established companies have the capability to built it out.

So all the hope and optimism is plowed into a handful of incumbents, Nvidia chief among them. That kind of concentration can backfire once an investing theme hits a major setback, Mr. Shuttleworth said.

“Once the stock starts coming off, you’ve got a whole bunch of day traders and retail investors who are going to start selling shares.”