Nvidia Stock Has Wiped Out $1.7 Trillion in Value Since October. What Could Happen If Jensen Huang Steps Down?

In just five weeks, Nvidia (NASDAQ:NVDA) has gone from the most valuable company in the world to a test case for one of investing's oldest questions: What happens to a company when the person who built it might have to leave?

Nvidia was worth about $5.78 trillion at its record close on Oct. 6. By about noon ET on Tuesday, it was worth about $4.04 trillion. That's roughly $1.7 trillion in value gone, a drop of about 30%.

What happened this week

Over the weekend, CEO Jensen Huang acknowledged an extramarital affair in an email to employees. The woman is reportedly a former executive at Megaspeed, a Singapore company that buys Nvidia hardware. U.S. intelligence officials reportedly suspect she passed information to Beijing, and China has rejected the allegations.

On Sunday, Nvidia's board said a committee of independent directors, with outside lawyers, would investigate whether Huang was the target of a foreign intelligence effort. The board said it had "no reason to believe that either national security or NVIDIA secrets were compromised" and that Huang had agreed to cooperate fully.

Since then, shareholders have filed a proposed class action against Nvidia and Huang, saying they were misled. President Donald Trump said the FBI is looking into the relationship, though he added, "I think he'll be in good shape."

None of that has forced Huang out, but investors now have to price in the chance that he leaves.

Why Huang matters so much

Huang co-founded Nvidia in 1993 and has run it ever since. Nvidia itself flags the risk. In its latest annual report, it warns that "we are highly dependent on the services of our long-standing executive team" and that "failure to ensure effective succession planning" could hurt its "long-term success."

What analysts are saying

Wall Street is trimming its expectations, but analysts aren't walking away. Wells Fargo cut its price target to $300 from $315 but kept a buy-equivalent Overweight rating, citing the investigation and the risk of losing a key leader. The bank said it sees little threat to AI demand or Nvidia's underlying business, and even after the cut, the target is about 80% above Tuesday's price. Meanwhile, Bernstein, which has an Outperform rating on shares, said the espionage claims appear to be "more form than substance" but noted that the allegations nevertheless represent a significant key-man risk. And Bank of America removed the stock from its "US 1 List" of top investment ideas.

Others see the sell-off as a bet on Huang himself. Gene Munster of Deepwater Asset Management said on a podcast this week that the stock now prices in roughly a 25% chance that Huang leaves, which is higher than his own estimate of 10% to 15%. Russell Pillemer, CEO of Pengana Capital, called Huang the "intellect" behind Nvidia and said there is "nobody who is an obvious successor."

What history says

Of course, there's no perfect comparison here, but there are past examples of key company executives leaving their firms under unexpected circumstances. The pattern? When the business is healthy, and the successor is clear, the company recovers, but when either is missing, the damage can last.

• Wynn Resorts (NASDAQ:WYNN) fell about 10% in a day in January 2018 after sexual-misconduct allegations against founder Steve Wynn, which he denied. The stock lost roughly 20% of its value within days, and Wynn ultimately resigned as CEO weeks later, but the casinos kept running.
• Hewlett-Packard (NYSE:HPQ) fell about 8% the trading day after CEO Mark Hurd was pushed out in August 2010 over inaccurate expense reports, but the bigger hit arguably came next. His permanent successor, Léo Apotheker, cut HP's forecasts three quarters in a row. Then in August 2011, HP said that it might sell or spin off its PC business, would kill its new TouchPad tablet, and would buy software maker Autonomy for about $10 billion. The stock fell about 20% the next day. Apotheker was fired after 11 months.
• Apple (NASDAQ:AAPL) fell about 5% after hours when Steve Jobs stepped down for health reasons in 2011. Tim Cook was already running day-to-day operations, and Apple ultimately became far more valuable under him.

So what happens if Huang leaves?

In the short run, probably another drop. Nvidia has no obvious No. 2: Huang holds both the president and CEO titles, and its annual report lists just four other executive officers, two of them 71. A board would likely need an interim leader or an outside search, and investors hate uncertainty.

But the business wouldn't change overnight. Nvidia's business looks healthy. In its latest quarter, revenue rose 106% to $96.2 billion, and data center sales reached $89 billion. The company expects about $108 billion in revenue this quarter, and that forecast already assumes no data center computing sales in China. Meanwhile, its chips are already in production, and this quarter's forecast doesn't depend on who signs the letters. The bigger question is the next five years: who sets strategy, and who manages Nvidia's relationships with Washington and its biggest customers.

What to watch

Nvidia reports quarterly results on Nov. 17, next Tuesday. Investors should listen for three things: whether management addresses the board investigation, whether it says anything about succession, and whether its outlook holds up.

If Huang stays and the investigation clears him, today's price may look like an overreaction. If he leaves without a clear successor, the HP example suggests the drop could deepen. Either way, this is now a bet on leadership as much as on semiconductor stocks. Investors who own Nvidia should keep the position at a size they can live with until the board reports its findings.

Jonathan Ponciano has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, HP, and Nvidia. The Motley Fool has a disclosure policy.