Nvidia sell-off continues: Chipmaker stock plunges 9% as Jensen Huang faces espionage controversy

Shares of Nvidia, the US semiconductor giant, came under heavy selling pressure on Monday, falling as much as 8.78% to an intraday low of $170.24 on the Nasdaq after the company launched an investigation into reports that CEO Jensen Huang had been the target of a foreign intelligence operation.

The development follows Huang's admission of an intimate relationship with a business executive reportedly identified by US intelligence agencies as a Chinese spy. China's Foreign Ministry, however, dismissed the espionage allegations on Monday, describing them as a smear campaign against Beijing.

Nvidia shares subsequently recovered some of their losses but continued to trade lower. At around 10:02 a.m. ET, the stock was quoted at $177.755, down 4.76% from its previous close of $186.64. The counter traded within a range of $170.24 to $178.73 during the session, giving Nvidia a market capitalisation of approximately $4.28 trillion.

Espionage allegations put Nvidia CEO under scrutiny

The controversy centres on Alice Huang, a former television reporter in China who later became a senior executive at Singapore-based data centre company Megaspeed, one of Nvidia's biggest customers in Southeast Asia.

According to a report by The Times last month, US intelligence agencies had discovered that Alice Huang, a Chinese citizen and chip buyer, was allegedly passing information directly to China.

In a message to employees released on Sunday, the 63-year-old Taiwanese-born Nvidia chief acknowledged being unfaithful to his wife and apologised to his family and company staff.

"I was unfaithful to my wife. My actions hurt her and our children. There is no excuse for what I did. I am deeply sorry," Huang wrote.

He also acknowledged falling short of his responsibilities as the company's chief executive.

"Leading Nvidia is the privilege of my life. My responsibility is to serve you and be worthy of your trust. I have fallen short of that responsibility," he added.

Nvidia's board has initiated an investigation into reports that Huang may have been the target of a foreign intelligence effort. The board said it had "no reason to believe" that national security or the company's confidential information had been compromised, while confirming that the inquiry would examine all available information.

Huang has agreed to cooperate with the review and will remain in his position as CEO during the investigation.

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Bernstein retains Outperform rating

Despite the controversy, Wall Street brokerage Bernstein maintained its Outperform rating on Nvidia, along with a target price of $4,000. However, the brokerage cautioned that the episode could become a significant distraction for the company and expose it to heightened regulatory scrutiny.

Bernstein said some of the espionage-related allegations appeared to have "more form than substance" at this stage, although it acknowledged that the developments represented a "very bad look" for Nvidia.

The brokerage questioned the substance of certain allegations, particularly claims that Alice Huang may have influenced Jensen Huang to lobby the US government for greater access to the Chinese market for Nvidia products.

According to Bernstein, such influence would have been unnecessary, given that the Nvidia CEO had been advocating greater access to China for years. Those efforts, however, have yielded limited results, with the company's sales in the country remaining low.

The brokerage also examined concerns surrounding the possibility of advanced AI chips being sold to China. It pointed out that the products currently permitted by the US, including the H20 and H200 in limited quantities, are lower-end offerings and several generations behind the industry's most advanced chips.

Moreover, these products are not currently being sold in the region primarily because of resistance from China, which has been prioritising domestic alternatives.

Against this backdrop, Bernstein said it remained unclear why any alleged encouragement from Alice Huang would have been necessary or effective.

Nevertheless, the brokerage cautioned that, if Alice Huang was indeed a spy, there could have been other ways to obtain information without involving Jensen Huang directly, including through channels outside Nvidia's corporate devices. It maintained that the allegations remained a serious concern pending the outcome of the investigations.

Beyond the espionage allegations themselves, Bernstein warned that the controversy could turn into a major distraction for Nvidia and its chief executive.

The brokerage said headlines portraying the episode as a case of "NVIDIA's CEO got honeypotted by China" could provide ammunition to politicians on both sides of the US political spectrum. These include China hawks in the US Congress, who are already dissatisfied with Washington's current approach towards Beijing, as well as incoming Democrats critical of the close relationship Jensen Huang has developed with President Donald Trump over the past few years.

While Bernstein does not expect demand for Nvidia's products to be affected, it sees the potential for increased regulatory risks as the expansion of AI infrastructure becomes an increasingly political issue.

The brokerage expects the latest developments to keep both Nvidia and its CEO at the centre of that debate.

Jensen Huang's leadership raises key-man risk

Bernstein also highlighted the significant key-man risk arising from Nvidia's dependence on Huang's leadership.

The brokerage noted that Nvidia was not an ordinary company and Huang was not an ordinary CEO, given his central role in shaping the company's long-term strategy and direction.

With reportedly around 60 direct reports, Huang exercises considerable influence over Nvidia's operations and decision-making.

Bernstein said it was not immediately clear who could take over the company's leadership if Huang became unwilling or unable to continue in his role for any reason.

It added that China would clearly be the primary beneficiary of Huang's removal as Nvidia CEO, while expressing hope that cooler heads would prevail.

The brokerage said the developments were difficult to view positively, as they had brought the leadership of one of America's most important companies, and the architect of the country's AI trajectory, under scrutiny.

It added that Alice Huang's background and intentions, as well as what Jensen Huang may or may not have known, would be critical questions as internal and external investigations progress.

For now, Bernstein expects the uncertainty surrounding the episode to remain an overhang on Nvidia for some time, even as it maintains its bullish stance on the stock.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here