Explained: Why Nvidia shares dropped 4% in overnight trade and what analysts warn can trigger a bloodbath?

Nvidia shares fell more than 4% in overnight trading on Monday after CEO Jensen Huang acknowledged having a close relationship with a business executive reportedly alleged by US intelligence to be a Chinese spy. The reports have prompted the company to launch an investigation.

Nvidia shares dropped to $178 apiece overnight. This came after Huang in a message to company employees released on Sunday acknowledged having an affair and apologised to both 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,” the 63-year-old Taiwanese-born executive said.

“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 further wrote in the letter to employees obtained by The Associated Press.

Also read | Nvidia probes CEO Jensen Huang’s affair with alleged Chinese spy: Here’s the lowdown

Who is Alice Huang?

Why the personal matter of the CEO may have spooked investors is because the person he has been intimate with is Alice Huang, who previously was a television reporter in China before becoming a top executive at Singapore-based data centre company Megaspeed, which has become 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 feeding information directly to China.

“I love our country and our company. I am committed to protecting Nvidia and supporting America’s national security,” Jensen Huang said. Nvidia meanwhile launched the investigation into reports that the CEO was the “target of a foreign intelligence effort.”Nvidia’s board said it has “no reason to believe” that either national security or Nvidia secrets were compromised, but that its inquiry would examine all available information. Huang “fully supports the review and has committed to cooperating with it,” the board said. Huang will continue to hold the position of CEO during the investigation.

Also read | Nvidia CEO Jensen Huang’s secret affair: Why did US intelligence suspect Alice Huang of spying for China?

Donald Trump, Musk back Nvidia CEO

US President Donald Trump said he thinks Nvidia CEO Jensen Huang is an honourable guy. “I have not spoken to him about it. I just know he’s a fine person, but you never know what is going on. I hope everything’s fine,” he said.

Sequoia Capital partner Shaun Maguire described Huang as “one of the greatest entrepreneurs of this generation”, while acknowledging that the Nvidia chief had made a serious mistake. Tesla CEO Elon Musk reacted to Maguire’s post with a brief endorsement, saying: “I agree.”

Billionaire Bill Ackman said Huang has done a lot of good for the world and he hopes the damage here is minimal. “That is, I am hoping for a simple affair, not a risk to our national security,” he said. “I am not suggesting he gets a free pass. If indeed this is more than an affair, then it is obviously a real problem.”

What lies ahead for Nvidia shares?

This boardroom storm at Nvidia has landed at a brutal time for the AI trade, but Nvidia’s earnings on November 17 are the real next test, Reuters quoted Etoro lead analyst Josh Gilbert as saying. While the investigation is likely to dent sentiment, it won’t alter anything long-term unless it leads to a change at the top, at which point it becomes a completely different ball game, the analyst said.

Will Huang get replaced? Pepperstone Head of Research Chris Weston doesn’t think so. “I think given that he is like the godfather of AI and, you know, the OG of what has been the biggest investment thematic that we’ve seen in a generation,” Reuters quoted him as saying.

If things went south and Huang had to step down, then Nvidia shares may see an absolute bloodbath, according to the analyst. “If it is found out that she’s confirmed as a spy, then, crikey, it doesn’t go well.”

Also read |I was unfaithful to my wife: Nvidia CEO Jensen Huang admits secret affair with Chinese spy Alice Huang; all you need to know about the controversy

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