After Jensen Huang’s Departure, Nvidia Just Did Something It Hasn’t Done Since 2019

Nvidia (NASDAQ:NVDA) has experienced a tumultuous week, finishing with the departure of its founder and chief executive officer, Jensen Huang. This happened amid allegations of two affairs, one with a woman U.S. intelligence agents say is a spy for China. Nvidia called on chief financial officer Colette Kress to take on the role of CEO until a permanent one is found.

Against this backdrop, Nvidia stock slid 10% from the start of the week through the closing bell on Thursday. And this put the shares on track for an annual decline after three years of explosive gains.

Nvidia is making another unusual move, too. In fact, the stock just did something it hasn't done since 2019. Let's zoom in for a close look.

Image source: Getty Images.

From video games to AI

Before we get to that, though, let's consider Nvidia's path so far and its recent troubles. Huang founded Nvidia more than 30 years ago with a focus on graphics processing units (GPUs) to power video games, and that was the company's bread and butter for quite some time. Then, about a decade ago, Nvidia recognized the artificial intelligence (AI) opportunity and seized it, developing GPUs specifically for this market.

That proved to be a genius move, as Nvidia has since become the world's AI chip leader, and this position has generated enormous revenue growth. The tech company has transformed into a giant, generating $215 billion in revenue in the latest fiscal year, and this is with strong profitability on sales. Gross margin has well surpassed 70%.

Huang has been more than just a CEO, with his passion for the business and AI ambitions catapulting him to almost superstar status. Considering Huang's key role in Nvidia's story and strategy, his departure has prompted investors to question the company's future direction. Huang stepped down on Thursday, days after the board launched an investigation into the affair allegations concerning Huang and a woman in Asia. Meanwhile, The New York Times reported that Huang also had an affair with an Nvidia executive.

Today, with Kress at the helm, Nvidia aims to move forward at a key moment: It's set to report quarterly earnings next week. Investors will have their eyes on that as well as on the progress of the CEO search. The company is looking at candidates internally and externally.

Nvidia's rare move

Against this backdrop, Nvidia stock did something it hasn't done since 2019: It slipped to a valuation of about 21x trailing 12-month earnings.

NVDA PE Ratio data by YCharts

This looks incredibly cheap for a well-established company like Nvidia, particularly considering its solid leadership in the AI market and the overall growth expected in this market in the years to come. We're in the early days of actually applying AI to real-world problems, and AI chips are needed for these processes.

So does this bargain valuation make Nvidia a screaming buy right now? This is where things get tricky. If the recent turmoil hadn't happened, I would answer the question with a resounding "yes."

Today, however, Nvidia faces a certain amount of uncertainty. A CEO's strategy may determine whether a company is successful or not in the years to come. Right now, there's reason to be optimistic that Nvidia will make the right choice in this important search -- but without 100% certainty, this remains a risk.

Orders and sales in the coming months should march on as planned, as contracts aren't drawn up and fulfilled overnight. But the question is more about which direction the permanent CEO will take in the coming years. On top of this, following allegations about Huang's interactions with a possible spy, Nvidia could face questions and even government regulation. This represents a potential headwind.

So, considering this picture, what should investors do? Your decision should depend on your comfort with risk. Even at today's price, risk-averse investors might choose to remain on the sidelines. Aggressive investors, however, may scoop up a few shares of Nvidia at this bargain price and hold on to potentially capture gains over the long run.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.