Nvidia – A Severe Test pt. II

Jensen’s chances nosedive.

• The revelation of a second relationship damages Jensen’s reputation still further and makes it much more difficult for him to remain as CEO of the company that he founded.
• This is almost certain to trigger another leg down in the share price, turning a rare opportunity into a fire sale.
• The New York Times (see here) is reporting another relationship, but this time, it is with one of his direct reports, which is potentially far more problematic.
• There are two reasons for this:
  • First, credibility: as Jensen’s original apology now looks insincere and aimed at drawing a line under the incident rather than a genuine apology to his family and the company.
  • As a target of a foreign intelligence effort, it is easy to understand and look past being lured into a trap, but the second relationship is something quite different.
  • The result is that Jensen’s previously unimpeachable reputation with customers, colleagues and the public more generally, now lies in ruins from which it may never recover.
  • Consequently, his effectiveness in leading Nvidia may already be damaged beyond repair, meaning that the board has no choice but to remove him.
  • Second, conflict of interest: which could also force the board to remove Jensen from his position as CEO.
  • This is a very similar situation that led to the ouster of Brian Krzanich, but critically, Nvidia’s policy does not explicitly ban these relationships like Intel’s does.
  • Instead, Nvidia states that it avoids conflicts of interest and notes that personal relationships may be a source of such conflict.
  • However, the NYT report alleges that a person who recorded an interaction was taken aside by Jensen’s security and asked to sign a non-disclosure agreement.
  • This immediately raises the question of whether this person was paid to sign the NDA and whether corporate resources were used to keep the relationship private.
  • Nvidia policy states that “a situation that could present a perceived or actual conflict of interest” should be disclosed to Employment Legal for guidance.
  • It is not hard to see how Jensen could be seen to be not following the policy of the company he leads, putting him and the board in a difficult position.
• I think that the board will want to do everything that it can to retain his services, but this is now looking much more difficult.
• However, a company is greater than one man, and there were times when the market fretted about Apple losing Steve Jobs, but under Tim Cook, it survived and thrived.
• Consequently, I think that Nvidia can bounce back from this severe test, but it will require preserving the magic that Jensen created.
• As the CUDA lock-in begins to fade, more than ever, Nvidia is dependent on its rapid product cadence, which is made possible by the unique processes that Jensen built, which will now likely need to be taken over by someone else.
• I think that the worst-case scenario here is that more allegations emerge and Jensen is fired, leading to the shares crashing another 25%, taking them to around $120.
• This would be 50% off its highs and a 2027 calendar-year PER of 6.9x, where the revenues and profits are pretty much already in the bag.
• This is a fire-sale valuation, and as long as there is no clear hit to the engine of chip sales, this will be the time to take the other half of my position.