Retail investors aren't buying into the AI hype yet, and the boom pales in comparison to the meme-stock bubble

• AI-related stocks have soared this year, but retail investors aren't driving the action, Vanda Research said.

• "Our in-house US equity positioning shows retail investors remain on the sidelines despite the recent AI craze."

• The AI trend is also relatively small compared with the meme-stock frenzy surrounding GameStop and AMC.

Artificial intelligence-related stocks like Nvidia have soared this year, but according to one research firm there's a portion of financial markets that hasn't heavily jumped into the buying frenzy: individual investors.

"Our in-house US equity positioning shows retail investors remain on the sidelines despite the recent AI craze," Vanda Research said in a note last week, adding that institutional investors were the primary drivers of demand for AI stocks.

Its note arrived during a big week for Nvidia that underscored the broad interest in AI set off by ChatGPT's launch late last year. Shares rallied more than 20% last week after the chipmaker said the AI boom was behind its decision to hike its quarterly revenue projection to $11 billion.

So far this year, Nvidia stock has shot up 167%. Meanwhile, the Global X Robotics & Artificial Intelligence ETF has soared 33%, and the ROBO Global Robotics & Automation Index ETF is up 19%.

But that hasn't spilled over to the retail side. Vanda, which monitors activity among nonprofessional investors, looked at media mentions about AI since October alongside net purchases of AI-sensitive stocks by individual investors.

"The craze seems to have only sparked a marginal increase in retail buys, at least for now," Marco Iachini, Vanda's senior vice president of research, said in the note. "Indeed, overlaying news mentions vs. retail flows into AI-linked stocks and ETF shows that individual traders are thinking twice before jumping into some of these names."

Net retail flow into the buzzy pocket of the equity market reached roughly $250 million on a 10-day moving average late last year as news mentions of AI ramped up. Since then, that flow has slowed to roughly $100 million on a 10-DMA through May.

And while the arrival of ChatGPT may be seen as a transformative, black swan event, the AI trend is still relatively small compared with the meme-stock trading phenomenon, Vanda added.

Kicking off in 2020, retail traders on Reddit's WallStreetBets forum and other social media sites banded together to squeeze short positions against hedge funds that were betting against stocks including GameStop and AMC.

"Take, for example, the two most-popular stocks during the meme bubble, GME and AMC, and compare them to two AI juggernauts, NVDA and AMD," said Vanda.

"The former duo attracted more retail flows during the two meme stock peaks of 2021 than the latter, despite having combined market caps of barely $2 billion vs. NVDA and AMD's combined market cap of $430 billion at the end of December 2020."

The "only GME-like stock" attracting retail capital is AI enterprise software company C3.ai, but individual investors have refrained from chasing C3.ai aggressively – another sign of cautiousness, Vanda said.

Overall, retail investors have broadly pulled back in their participation in the equity market after serving as a pillar of support for most of the past year, the firm said.

Earlier this year, retail investors spent a record $1.51 billion daily in the US markets. That spending has slowed to about $390 million in daily net purchases of US-listed securities through May.

Vanda thought the strong run in tech stocks could have bolstered retail confidence.

"However, it's becoming evident that more concrete signs of a Fed Pause, further progress on inflation, and resiliency in the macro environment are likely key missing elements for retail participation to build back up," it said.

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