Nvidia’s Problems: A CEO's Scandal and Competitors Breathing Down Its Neck

One of the most important figures in the world of financial markets and technology, Jensen Huang, has been caught cheating. This scandal would not matter much to financial markets were it not for a number of factors, such as the fact that the person to whom Jensen Huang showed romantic interest turned out to be Alice Huang, who according to a “New York Times” investigation is allegedly a contact of Chinese intelligence.

What do we know?

1. The situation is developing and still unclear. In a letter published on November 8, Mr. Jensen admitted infidelity. He did not identify the other person and did not confirm the espionage allegations.
2. The board has initiated an independent review overseen by independent directors and outside counsel. The board says that, at present, there is no reason to believe national security or company secrets have been compromised. This is the board’s position at the start of the investigation, not its final outcome.
3. The chairs of three government committees involved in the matter requested a closed briefing on November 18. A response or an alternative date is to be provided by November 11.
4. Singaporean authorities confirm an investigation involving Megaspeed, but they denied reports that they are conducting their own inquiry into Alice Huang’s ties to China, as well as statements attributed to them by “The Wall Street Journal.”

What is the risk?

If any operational or regulatory risk materializes as a result of confirmation of the suspicions or rumors circulating, the threats to valuation have the following vectors:

Operational risk: If Jensen Huang had an affair with someone who turned out to be a Chinese spy, and this operative somehow obtained confidential information about the company or its operations, it could affect Nvidia’s competitiveness in the market and seriously damage the company’s valuation. However, it is difficult to estimate the real threat and the scale of any leak, if one occurred. What must be emphasized is that Nvidia’s huge market advantage is not only an advantage in specific technological processes. It is an advantage of the ecosystem and the synergies between the most advanced chips of this type in the world. Even in the worst case, it is hard to imagine a scenario in which China is able to replicate Nvidia’s technology, given, among other things, the lack of sufficiently advanced lithography.

Regulatory risk: Regardless of the outcomes of the investigations, the scandal may contribute to further export restrictions and or increased US oversight of its technology sector. This could slow overseas sales, capital flows, and reduce the profitability of certain investments. This could negatively affect not only Nvidia’s valuation but also that of the entire sector.

Market risk: In an extreme case, Jensen Huang could be removed as CEO by the board, though it is hard to treat this as the base case today. That would mean a decline in market confidence in the company’s leadership and a test of the capabilities of a potential successor. Even more problematic is the issue of Mr. Jensen’s marital property arrangement with his wife, as they seem to not have a separation of property agreement (a prenuptial agreement). This implies a theoretical possibility that Lori Huang, Jensen’s wife, could receive part of the shares as part of a division of assets in the event of divorce proceedings. However, this would not automatically mean those shares would be sold and or impose a cost on Nvidia itself. Importantly, Ms. Lori already co manages a significant portion of the family stake through a set of trust entities.

Market context

Nvidia’s ratio based analysis suggests the company is currently “cheap” relative to consensus future earnings, but much less cheap relative to the cash it actually generates.

The median EPS forecast for Nvidia for 2027 and 2028 currently hovers around USD 9.3 and USD 15.9, respectively. At the current valuation this implies a forward (12 month) P/E of about 18. The picture looks worse on a free cash flow basis, where forward metrics imply about 20 to 24 depending on assumptions.

The compression of multiples and valuations in recent months implies not so much that Nvidia is “cheap” today, but rather that a meaningful “buffer” has formed in the valuation that already reflects expectations of potential negative surprises. The key question for investors remains how events develop in the context of the scandal. If the Huang matter ends mostly with reputational costs, and forecasts and cash conversion hold up, the sell off may, though it does not have to be, excessive.

A moment of weakness at the company, real or not, is being exploited ruthlessly by aspiring competitors. Just a few hours after the scandal involving the CEO became public, Google announced further initiatives in the chip segment (TPU). The new TPU 8tx and 8i Max models were designed with different workloads in mind, reflecting Google’s view that the next phase of AI development will require increasingly specialized hardware.

As of today, drawing a qualitative conclusion about the rivalry between Nvidia and Google products that still have yet to enter mass production is very difficult. However, increasing competitive pressure, even if it does not translate into sales losses, may weigh on valuations under the burden of investments needed to maintain an edge.