At first, it looked like Nvidia’s pain might be the rest of the chip sector’s gain. But now, investors aren’t so sure.
After news broke this weekend that Nvidia’s board of directors had launched an investigation into whether one of former CEO Jensen Huang’s relationships compromised business secrets, the PHLX Semiconductor Index posted a 10.6% gain across the first four days of the week. The thinking was that a potentially weaker Nvidia could mean more opportunities for direct rivals and afford more pricing leverage to suppliers. Huang resigned as Nvidia’s chief executive on Thursday morning.
But the SOX index was down 3.4% on Friday as investors grappled with the idea that Nvidia and Huang served a dual function in the technology ecosystem — not only supplying chips but also propping up the artificial-intelligence industry from a financial standpoint.
Shares of Advanced Micro Devices, which rose in the immediate aftermath of Huang’s resignation, slid 8.8% on Friday, pacing the S&P 500’s decliners. Shares of Sandisk were down 5.6%, while those of Broadcom fell 4.8%, and shares Intel and Micron Technology each lost 2.5%. Dell’s stock was off 7.2%.
Pei-ju Lee, an analyst at investment advisor Bradley, Foster＆Sargent, attributed the sector’s declines to reports suggesting Nvidia’s “circular investment” strategies could come under review with the eventual appointment of a new CEO.
Huang was known for forging financial relationships with Nvidia suppliers and customers, a concept referred to by some on Wall Street as circular financing. Luke Lango, a technology analyst and author of the Innovation Investor newsletter, said this practice led to Nvidia being dubbed as the “central bank of AI” in certain circles.
This sponsorship within the AI ecosystem is one of the reasons “why we have this AI trade,” Lee noted.
One such financing arrangement is Nvidia’s relationship with CoreWeave, a cloud-computing company that rents Nvidia’s GPUs to AI labs, while also taking in billions in investments from the chip maker.
Nvidia has poured over $60 billion into over 200 startups, including AI labs OpenAI and Anthropic, according to the Financial Times.
D.A. Davidson analyst Gil Luria told MarketWatch that with Huang gone, Nvidia “is less likely to invest in its customers’ business as it has been.” He said that Nvidia’s investments had been “compelling” Broadcom and AMD to make similar deals with their own customers.
“If Nvidia stops investing in its customers, Broadcom and AMD don’t need to participate in this type of activity in order to compete,” Luria said. “That means less capital available for customers” to buy chips, he added.
Lango noted that “to be fair,” interim Nvidia CEO Colette Kress “publicly defended the deals as smart investments” in her role as company CFO.
“And the pullback started under Huang himself,” he added, saying that if Nvidia were to slow its course on financing deals, Kress wouldn’t be “reversing course” so much as “speeding up a retreat that was already underway.”
“Our expectation: few new circular deals, and pressure on the existing ones,” Lango said.
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