Nvidia Corp.'s investigation of Chief Executive Officer Jensen Huang's affair with an alleged Chinese spy is raising questions about the company's future and sending its stock into a tailspin.
In the wake of Huang's shocking disclosure in a memo to Nvidia employees on Sunday, Wall Street is wondering if the biggest and most important artificial intelligence chipmaker will be able to keep its leader and public face. The stock fell roughly 10% in the two sessions since the news hit, making it the second-worst performer in the S&P 500 Index over that time, and it closed at its lowest since March 30 on Tuesday. The shares jumped about 3% at the open Wednesday as the stock market broadly rallied.
Now, cracks are emerging in Wall Street's overwhelmingly bullish sentiment toward the AI darling. Baird downgraded the stock to neutral on Wednesday, while Morgan Stanley removed it as a Top Pick. Both cited growing uncertainty surrounding Huang.
“If he goes, the bull case goes with him,” said Jay Goldberg of Seaport Global Securities, the only analyst with a sell rating on the stock. “Trying to conceive of a Nvidia without Jensen seems impossible. If he gets ousted, the floor would fall out from under the stock. I don't know how likely that is, but it would be shattering.”
Nvidia shares had been under pressure prior to this crisis as investors increasingly questioned the durability of the AI trade and the hundreds of billions of dollars in capital expenditures that are funding it. The stock got hammered after the midterm elections delivered a rebuke to building AI data centers and is on pace for its sixth-straight week in the red, something that hasn't happened since 2012. Nvidia shares have fallen more than 20% since hitting a high on Oct. 6, bringing the company's market value down to around $4 trillion from $5.8 trillion a month ago.
“Even before the midterms, the market was changing how it felt about the cost of the AI buildout, and the election only increased the level of uncertainty,” said Simeon Wallis, chief investment officer of Aprio Wealth Management. “Now it has to wait and see what happens with Nvidia's board, which adds more fog around the story.”
This earnings season showed how concerned investors are about AI spending, especially at companies that are posting negative free cash flow like Alphabet Inc., Meta Platforms Inc. and Amazon.com Inc. Those three represent about 23% of Nvidia's revenue, according to supply chain data compiled by Bloomberg, and their stocks all slumped after their latest earnings reports showed rising capital expenditures for AI.
The prospect that these so-called hyperscalers could pull back on their spending gained new potency following last week's election victories by candidates who oppose data centers in key states like Texas. If it becomes harder to build AI infrastructure, Nvidia's growth outlook will invariably suffer.
“It's too early to tell whether things have fundamentally changed,” Wallis said. “But it's hard to have much conviction over the short term.”
Of course, one upside to the selloff for investors is it has made Nvidia's stock price historically cheap. The shares are trading around 12 times earnings expected over the next 12 months, their lowest multiple since 2013. Measured as a ratio, Nvidia hasn't been this inexpensive relative to the S&P 500 since 2002. And its PEG ratio, which is calculated by dividing its price-to-earnings ratio by its profit growth rate, stands at an all-time low of 0.162.
“The uncertainty around Jensen is such a large, looming problem that it is now very difficult to suss out what a fair value would be,” Seaport's Goldberg said. “It is easy to see it getting worse before it gets better.”
So far, analysts have held their estimates for Nvidia's earnings and revenue in fiscal 2027 and 2028. However, they're likely to be refreshed next week after the company posts its third-quarter results on Nov. 17. The chipmaker's net income and revenue are expected to jump more than 90% in the quarter and fiscal year, which ends Jan. 31.
That soaring growth and the stock's low multiple are the key reasons Wall Street remains largely positive on Nvidia. Of the 82 analysts tracked by Bloomberg who follow the stock, 77 have buy ratings, and the average analyst price target indicates expectations that the shares will rise nearly 90% over the next 12 months.
Nvidia's pricing power and dominance across the AI supply chain, along with its healthy profitability, should make the stock appealing to some investors at its current level, according to Daniel Newman, chief executive officer of the Futurum Group. The catch, of course, is the extreme degree of uncertainty surrounding the company.
“The optimistic view is that this is limited to a personal indiscretion, and if the investigation clears him of any additional wrongdoing, the stock should recover,” he said. “The problem is we don't know, and this is a unique and wild situation. I'm constructive on AI, but I'm watching Nvidia. I think a lot of investors feel the same — the selloff has created a lot of opportunities, but until this uncertainty plays out, they might pick something else besides Nvidia.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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