Nvidia's Jensen Huang under fire; Bernstein retains $4,000 target price on stock, but with key risks

Nvidia shares fell more than 4% in post-market trading on Monday, slipping to $178 apiece, after CEO Jensen Huang acknowledged having an intimate relationship with a business executive reportedly identified by US intelligence agencies as a Chinese spy.

Wall Street brokerage Bernstein, however, maintained its Outperform rating on the stock with a target price of $4,000, while warning that the controversy could become a significant distraction for the chipmaker and expose it to greater regulatory scrutiny.

The brokerage said some of the espionage-related allegations appeared to have "more form than substance" so far, although it acknowledged that the developments were a "very bad look" for Nvidia.

Bernstein questions espionage allegations

Bernstein questioned the substance of some of the allegations, particularly the suggestion that Alice Huang may have influenced Jensen Huang to lobby the US government to allow greater sales of Nvidia products to China.

The brokerage said such influence would have been unnecessary, given that the Nvidia CEO had been advocating greater access to the Chinese market for years. Those efforts, however, have not been particularly successful, with the company's sales in China remaining low.

It also questioned concerns surrounding the possibility of allowing advanced AI chips into China. Bernstein pointed out that the products currently permitted by the US, namely the H20 and H200 in limited quantities, are not only low-end offerings but also several generations behind the state of the art.

Moreover, these chips are not currently being sold in the region primarily because of Chinese resistance, as the country prioritises domestic alternatives. Against this backdrop, the brokerage said it was unclear why any alleged encouragement from Alice Huang would have been necessary or effective.

Nevertheless, Bernstein 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 company devices. It maintained that the episode remained a serious concern, irrespective of the eventual findings.

Nvidia controversy could invite greater political and regulatory scrutiny

Beyond the espionage allegations, Bernstein warned that the controversy could develop into a major distraction for Nvidia and its CEO.

The brokerage said headlines suggesting that "NVIDIA's CEO got honeypotted by China" could provide ammunition to both sides of the political aisle. This includes China hawks in the US Congress, who are already unhappy with Washington's current approach towards Beijing, as well as incoming Democrats critical of the close relationship Jensen Huang has cultivated with President Donald Trump over the past few years.

While Bernstein believes demand for Nvidia's products is unlikely to be affected, it sees scope for increased regulatory risks as AI infrastructure expansion becomes an increasingly political issue. The brokerage expects the latest developments to keep both Nvidia and its CEO at the centre of that debate.

Bernstein flags significant key-man risk

The brokerage also highlighted the considerable key-man risk Nvidia faces because of its dependence on Jensen Huang's leadership.

Bernstein noted that Nvidia is not an ordinary company and Huang is not an ordinary CEO. He effectively is Nvidia, given his central role in setting the company's long-term strategy and direction. With reportedly around 60 direct reports, Huang exercises considerable control over the company's operations and decision-making.

The brokerage said it was not immediately clear who could step in to lead Nvidia if, for any reason, Huang became unwilling or unable to continue in the role.

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

Bernstein 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.

The brokerage added that Alice Huang's background and intentions, along with what Jensen Huang may or may not have known, would be critical questions as internal and external investigations progress. At a minimum, it expects the uncertainty surrounding the episode to remain an overhang on Nvidia for some time.

What’s the controversy?

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. The Times reported last month that 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 executive admitted to 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 further acknowledged that he had fallen short of his responsibilities, adding, "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."

Nvidia has launched an investigation into reports that its CEO may have been the "target of a foreign intelligence effort". The company's board said it had "no reason to believe" that either national security or Nvidia's confidential information had been compromised. However, it added that the inquiry would examine all available information. Huang has agreed to cooperate with the review and will continue as CEO during the investigation.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘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.