A Third Affair! Jensen Huang Is Out, and Nvidia Stock Is Still in Trouble.
Nvidia (NVDA) moves to a new generation of chips once a year. The Jensen Huang scandal has kept a much faster release schedule, with three new versions in four days. Version one came out on Sunday, when Huang told employees in a memo that he had been unfaithful to his wife. Reports tied that affair to Alice Huang, a businesswoman U.S. intelligence officials suspect of spying for China, and on its own, that would have ended most CEO careers.
In the hours after, Huang looked like the exception. President Donald Trump called him “an honorable guy,” and billionaire investor Bill Ackman wrote that Huang was “an incredible human,” although Ackman added that he wasn't giving him a free pass. If the situation turned out to be more than an affair, Ackman wrote, it would be a true problem.
The second version came on Wednesday, and it handed Ackman his real problem from a direction he hadn't been watching. The New York Times reported that Huang also had a relationship with Kimberly Powell, Nvidia's vice president of health care, who reported directly to him. An affair with a direct report breaks the sort of rule a board can enforce without waiting for the FBI to finish its work, and on Thursday morning, Nvidia announced that Huang had resigned as CEO and as a director, effective immediately.
Then, Reuters reported that Huang had an intimate relationship with a second Nvidia employee. If you're keeping score, that makes three reported affairs, and now, zero permanent CEOs.
Huang Is Gone, and the Stock Kept Declining
According to CNBC, the board worked late into Wednesday night and made its decision official the next morning. It named CFO Colette Kress interim CEO and gave director Harvey Jones the first board chair title in Nvidia's history, and the search for a permanent CEO will consider candidates from inside and outside the company.
None of that housekeeping impressed the market. Nividia's stock opened Thursday at $151 and slid to a 52-week low of $148.80 before buyers stepped in, and it closed at $166.19, down 4.34% on the day. Some 735 million shares changed hands, which is 3.75 times the average volume, and the stock is now 31.71% below the $243.37 high it hit on Oct. 6.
Wall Street didn't wait around either. Ten analysts downgraded NVDA stock, and Bernstein cut its price target in half to $200. Bernstein's Stacy Rasgon summed up the mood when he said, “We've had enough, and prefer to watch from the sidelines.”
Nvidia Doesn't Have a Plan B
When Steve Jobs stepped down at Apple (AAPL), Tim Cook had already spent years as the company's chief operating officer. Nvidia's stand-in is its CFO, who now has two jobs while the board looks for someone to take one of them off her plate.
Kress has run Nvidia's finances since 2013, and DA Davidson called her “up for the task.” Unconventional AI CEO Naveen Rao said the board has three to four months to find a permanent replacement.
The bigger issue is that Huang built Nvidia to run through him. He kept 60 direct reports and never named a chief operating officer, which left the company without an obvious second-in-command. So when Newsweek asked governance experts who could replace him, the names beyond Kress included former Google (GOOG) (GOOGL) CEO Eric Schmidt and, of all people, Apple Executive Chairman Tim Cook.
Baird said on Wednesday that it thinks the odds favor an outside hire over an internal promotion.
Wall Street is already putting a price on the uncertainty. Dan Ives of Yorkville Ives cut his fair value estimate for NVDA stock from $300 to $225 after the resignation and called Huang “irreplaceable.”
The Scandal Isn't Finished With Nvidia
Huang's exit also leaves the investigations wide open. He agreed to testify before the House Foreign Affairs Committee before Thanksgiving, and Chairman Brian Mast said Huang “has some very serious questions to answer.”
Separately, the Justice and Commerce departments are investigating whether a Singaporean company bought advanced Nvidia chips to send to China. Truist, which downgraded the stock to “Hold,” said the risks now spread to Nvidia's culture and to whether its chips reached buyers in China.
How to Play NVDA Stock Now
Underneath all the noise, the business numbers are challenging to argue with. Nvidia guided for $108 billion in revenue for the quarter it reports on Tuesday, Nov. 17, and the stock trades at 18 times forward earnings, which is below the sector median of 19.8.
Mizuho analyst Jordan Klein called NVDA stock “silly cheap,” and even Ives's downsized fair value of $225 is 35% above Thursday's close.
This is a hypergrowth business at less than 20x forward earnings now.
I'd buy the dip despite all the noise. Nvidia will likely find a solid CEO, and the financials obviously remain rock-solid.
On the date of publication, Omor Ibne Ehsan did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.