Huang affair has thrown chipmaker Nvidia into a spy scandal. What's at stake?

Nvidia CEO Jensen Huang has admitted to an extramarital affair with a woman whom U.S. authorities suspect of working for Chinese intelligence, Bloomberg reports. The board of Nvidia, the dominant maker of AI accelerators for data centers, has launched an internal investigation to determine whether Huang was the target of a foreign intelligence effort. The biggest question for shareholders now is whether Huang will remain CEO.

A committee of independent directors, assisted by outside counsel, will oversee the investigation. The board has “no reason to believe” that U.S. national security or Nvidia’s secrets were compromised, but it will examine all available information, the company stated. Huang has pledged to cooperate with the investigation, and the board has confidence in him and his leadership team.

In a letter to employees on Sunday, Huang apologized to his family and addressed colleagues, partners, and shareholders, “My responsibility is to serve you and be worthy of your trust. I have fallen short of that responsibility.” According to Bloomberg, he had an affair with Alice Huang, a former senior executive at Singapore-based Megaspeed (she is unrelated to the Nvidia CEO). Megaspeed buys AI chips from Nvidia, and U.S. authorities suspect it helped Beijing obtain advanced chips that are barred from shipment to China, Reuters reports. As recently as late October, Huang told Bloomberg that his dealings with Alice Huang were “completely normal and not unusual,” Reuters notes.

Huang says the structure gives Nvidia the flexibility to adapt as technology changes rapidly. The downside, Bloomberg notes, is that no one inside the company is ready to step in and take on Huang’s demanding job. Nvidia has no public succession plan either.

Huang’s admission underscores the extent of Nvidia’s key man risk, according to Bernstein analyst Stacy Rasgon. “Nvidia is not an ordinary company and Jensen is not an ordinary CEO; he IS Nvidia,” Bloomberg quotes him as saying. Rasgon says Huang sets the long-term strategy himself and personally oversees most of the company’s operations.

“It is hard not to read the news over the weekend as negative,” the Bernstein analyst said. As of 12:00 Astana time on Monday, Nvidia shares were down 5.7% from their Friday close to $176.10 apiece on the U.S. over-the-counter trading platform Blue Ocean.

The outcome of the investigation will be crucial, reckons Dan Ives of Yorkville Ives & Co. In a note to clients cited by Yahoo Finance, he said he expects Huang to stay in the job in the near term. “There is clearly risk that Jensen could be removed as CEO depending on the Board investigation, and this will add risk to the stock as he is so important to the Nvidia story and strategy globally,” he warned.

Ives also expects U.S. authorities to scrutinize chip sales to China more closely, an issue that remains a major point of contention in Washington. On November 4, senior House Republicans called on Huang to brief Congress on a New York Times report about his relationship with Alice Huang. The lawmakers said the report raised “significant national security concerns” about China’s access to sensitive U.S. technology, Reuters reports.

Nvidia’s market capitalization reached a record of almost $5.8 trillion in October before slipping below $5 trillion, Bloomberg notes. The company will report quarterly results on November 17 after the U.S. market closes. The investigation is likely to weigh on investor sentiment, but the long-term outlook will stay the same unless the inquiry leads to a change in leadership, according to Josh Gilbert, lead analyst at trading platform eToro. If that happens, “it becomes a completely different ball game,” Reuters quotes him as saying.