Jensen Huang's exit will test AI's stocks, and great-man theory

Summary

Nvidia's crisis divides the AI trade between companies dependent on Huang's patronage, and those that didn't need his chips or financing deals.

Wall Street once believed the artificial-intelligence boom revolved around Nvidia's Jensen Huang as planets orbit the sun. The question now is what happens when a star implodes.

Huang's resignation Thursday following revelations that he had two extramarital affairs, including one with a suspected Chinese spy, threatens the artificial-intelligence boom he helped propel and tests the great-man theory that the course of history is often determined by singular individuals.

His departure also left investors scrambling to determine how much Nvidia's turn as a linchpin of markets and engine for economic growth relied on a charismatic leader in a leather jacket.

Huang didn't just transform a videogame chip designer into a $5 trillion giant synonymous with AI. He was AI's political face, and had President Trump's ear. He invested in so many AI companies that some compared Nvidia to the industry's central bank. A few words from Huang, not to mention a multibillion-dollar financing, could change a company's fortunes.

Thursday's trading brought an early verdict: Nvidia shares continued their selloff, of course, and so did several major beneficiaries of Huang's clout across the sector. But there was no widespread panic, at least not in the immediate aftermath of Huang's stunning fall; many of the AI hyperscalers -- and some of Nvidia's rival chip makers -- closed higher on the day.

"This was one man's 20-year vision," said Michael Monaghan, portfolio manager for the Founders 100 ETF. "That's not replaceable.

"The data shows that the stock will not perform as well with Jensen gone," he added, pointing to other founder-led companies that have outperformed over time. "For us, we'll sell it."

The AI trade was already stepping into a new era. Interest rates have been on the rise, lifting borrowing costs on the trillions required to fund the build-out. Political pushback that has been snowballing for months helped put data-center skeptics into office nationwide.

Huang's departure now adds a new wild card for investors reconsidering the relentless growth and bottomless financings that marked the boom's first four years.

Nvidia is facing mounting scrutiny over its influence on U.S. export controls and whether some of its world-leading semiconductors were illegally diverted to China. Investors are bracing for the possibility of more revelations to come, punishing a stock that hit a record just five weeks ago.

The company's shares have since crashed by 31%. At one point Thursday, Nvidia's market value had shed more than $2 trillion from its Oct. 6 high.

"We can't recollect a situation that combines a founding CEO's seeming overarching influence in determining the company's direction, the importance of the company (and its chief executive) to tech (and tech policy), and the lack of an apparent clear succession plan at the time of transition," Wedbush analysts told clients.

Across Wall Street, researchers scrambled to gauge the fallout. "Massive shoes to fill," Oppenheimer analysts wrote in removing their price target for Nvidia. "We've had enough," Bernstein said in cutting its own projection in half. Even Dan Ives, the colorfully dressed tech bull, foresees a less valuable Nvidia ahead.

The trajectory of companies after the departures of larger-than-life leaders is mixed. Berkshire Hathaway has gone less than a year without Warren Buffett at the helm. Disney struggled without Bob Iger to the extent that he took back the top job. Apple stumbled toward bankruptcy after Steve Jobs left the building for the first time. Later, once Jobs returned and then tapped Tim Cook as his successor, Apple became the world's most-valuable company.

But none of those firms were as central as Nvidia is to a technological revolution as large or sweeping as AI. The growth of the companies that comprise the industry has created trillions of dollars in wealth, propping up consumer spending key to the economy. It has also redrawn supply chains and America's approach to geopolitical power.

In the short run, investors say little has changed about the business prospects for Nvidia, which is set to report earnings next week in a quarterly update that has become a weather vane for the AI trade. "There are no pain points," said Ted Mortonson, a tech strategist at Baird. "It's so early [for AI] and they have such a profound lead."

But the search for a permanent replacement will ultimately dictate how Nvidia navigates a future of more competition from other chip makers, as well as oversight from Washington that links its fate to an AI arms race with China.

"It can't be some Pippi Longstocking consultant that everybody loves. Forget it," Mortonson said. "This has got to be someone on Jensen's par, and unfortunately there aren't a lot of people like that out there."

Another powerful man agreed that there isn't a deep bench for potential successors. "[T]here is only one man to take his place -- TIM COOK of Apple," President Trump said on social media Thursday. "A Legend replaces a Legend!"

For now, longtime Huang lieutenant Colette Kress will lead Nvidia in the interim. Kress has overseen the aggressive expansion of Nvidia's balance sheet, which the company has used to provide financial backstops for customers in exchange for buying its chips. She also pushed to scale back such a deal with OpenAI to support one of the world's largest planned data-center projects.

Any change to how Nvidia wields such financial power will be key for understanding the blast radius from Huang's departure. Beneficiaries of the company's largess, including cloud-computing operators CoreWeave and Iren, and Marvell Technology, a semiconductor-equipment manufacturer, all faced pressure in Thursday's trading session.

At the same time, shares in competing chip makers such as Broadcom and Advanced Micro Devices gained, as did stocks in the data-center hyperscalers that are among the biggest buyers of Nvidia chips.

Still, if Thursday was any indication, plenty of investors also believe that Nvidia will weather its leadership crisis thanks to surging chip demand. A sharp retreat that pulled shares as much as 14% lower quickly ignited one of the most powerful forces in American markets: traders buying the dip.

In the half-hour after the opening bell, everyday investors snapped up $111 million in Nvidia stock, according to Vanda Analytics, the most frenetic such period of buying on record. Many also used borrowed money to pile into riskier bets that shares will vault higher.

Nvidia's stock price closed 4.3% lower on the day, helping major indexes finish only slightly in the red. The potential for the company to shift to a lower gear even comforted some investors who are optimistic that the AI trade isn't over yet.

"The bond market has been screaming for the better part of a year that it wants growth to moderate. The equity market has been screaming that since June. The companies have not been listening," said Mark Hackett, chief market strategist at Nationwide. "That conversation got a lot louder after the election. Then you have this."

Huang's tale of heroism and hubris left Lloyd Blankfein, who once ran Goldman Sachs, to invoke a famous line attributed to French leader Charles de Gaulle.

"Sad about Jensen. Shakespearean," Blankfein wrote on social media. "But as de Gaulle said, 'The graveyards are filled with indispensable men.'"