ag.algebraic geometry - Smooth dg algebras (and perfect dg modules and compact dg modules)

The condition of Hom(M,-) being a continuous functor, i.e. preserving (small homotopy) colimits is equivalent (in the present stable setting) to the maybe more concrete condition of preserving arbitrary direct sums. The issue is not finite direct sums, that's automatic (since the derived Hom is an exact functor, it automatically commutes with FINITE colimits).
This is better known as a compact object of the dg category (see n-lab for lots of discussion).
This is a strong finiteness condition on a module. Its importance in algebraic geometry was realized by Thomason (in a dream form of his friend Trobaugh), who proved some amazing fundamental results about the behavior (and abundance) of compact/perfect objects on schemes.

One can think of Hom(M,-) as the functional on the category defined by M (Hom being a kind of inner product), and this is saying the functional is "continuous"..
There's a discussion of the different common notions of finiteness for modules and their properties (including the foundational results of Thomason and Neeman) in Section 3.1 of this paper (sorry for the self-referencing -- none of this is in the least original, but it's a convenient discussion with plentiful references). This includes an explanation of why compactness is the same as being in the thick subcategory category generated by the free module, which is your definition of perfect from K-S (ie built out of the free module by taking sums, cones, summands), and also the same as being a dualizable object with respect to tensor product in case your category is the derived category of quasicoherent sheaves (ie this is a "commutative" notion not applicable in the NC setting you're discussing).

By the way the definition from K-S is the standard definition of perfection, that from K-K-P is the standard definition of compactness.. there are settings where the two notions don't agree (for example for sheaves on the classifying space of a finite group in a modular characteristic, or on BS^1) [hence our terminology of "perfect stack" in the paper with Francis and Nadler, which is a stack where these notions for sheaves agree and these nice finite objects generate].

The fact that perfection of the diagonal (ie A as an A-bimodule) is equivalent to smoothness in the case of a scheme is a reformulation of the homological criterion of Serre for smoothness of a point in terms of finite Tor amplitude of the skyscraper at the point - ie we're saying all points are smooth all at once.