Hedge funds are betting billions that a stock loved by millennials is going to plummet

  • Nvidia has surged 95% since the election, making it the best-performing stock in the S&P 500 over the period. Now hedge funds and millennial investors are divided over its outlook.
  • The stock is the fourth most-shorted by hedge funds right now, judging by dollar amount of short interest, according to a Goldman Sachs study.
  • It’s also the sixth most-owned stock holding for millennial investors, according to no-fee trading app Robinhood.

A battle is brewing over the best-performing stock since the election.

The company in question is Nvidia, which has enjoyed a particularly charmed existence since November 8. The graphics chipmaker’s stock price has exploded 95% higher since then, the biggest gain in the S&P 500 by almost 30 percentage points.

On one hand, the company has been targeted by large speculators as a stock likely to decline, as reflected by the roughly $US3 billion in short positions held by hedge funds. That’s the fourth-highest level of short interest out of companies analysed by Goldman Sachs, which combed through 821 funds holding a combined $US1.9 trillion.

However, it’s also one of the favourite stocks for millennial investors. According to investment startup Robinhood, Nvidia is the sixth-most owned stock on their entire platform.

What’s more, options traders don’t seem particularly concerned about lofty valuations.

They’re paying the lowest premium in nearly three years to protect against a 10% decline in Nvidia’s stock over the next three months, relative to bets on a 10% increase, according to data compiled by Bloomberg. In fact, options investors are almost paying more to bet on further gains than to hedge, a rare occurrence for the stock.

And while share prices across the technology industry as a whole have soared since the election, Nvidia has even more going for it than strength by association and the adoration of millennials. On Wednesday, SoftBank announced a $US4 billion stake in the company, sending shares climbing as much as 3%.

Nvidia also turned in a blockbuster earnings report earlier this month, spiking 18%, the most in six months. The company was helped by strong demand for its chips that are used by major cloud computing providers in data centres.

In the grand scheme of things, this discrepancy between large institutions and individual investors is nothing new to the stock market. The tug-of-war is indicative of the scenario that usually plays out when a stock goes on a torrid run like the one seen by Nvidia.

Some people get drawn in by the hype and the prospect of a quick profit, while others get worried that valuations are overextended. In the end, the conflicting forces are healthy for the market, which is most susceptible to large shocks when euphoria is peaking.

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