Jensen Huang’s downfall threatens to burst AI bubble

When financial bubbles burst, the temptation is to look for a trigger. Maybe it’s a shift in interest rates, or an accounting scandal that brings down an influential company.

The future of the artificial intelligence boom is threatened by something altogether different: a chief executive who not only had an alleged affair with at least one employee, but had another with an alleged Chinese spy, too.

Jensen Huang resigned Thursday as CEO of Nvidia Corp. NVDA-Q, the company he founded in 1993 and transformed into the world’s predominant supplier of computer chips to power AI development. He also stepped down from its board of directors, with both exits effective immediately. Chief financial officer Colette Kress will lead the company on an interim basis, Nvidia said on Thursday.

Mr. Huang, 63, is departing amid a scandal at Nvidia, which is worth some US$4-trillion.

The company’s board had opened an independent investigation into whether Mr. Huang was the target of a foreign espionage operation after he disclosed an extramarital affair. U.S. media have reported he had been intimate with Alice Huang, an executive at Singaporean company Megaspeed International. Ms. Huang has been identified as a Chinese spy by U.S. intelligence agencies, according to The New York Times. The U.S. Commerce Department had also been investigating whether Megaspeed was shipping Nvidia chips to China, contravening export controls.

The Times reported on Wednesday that Mr. Huang had yet another affair, this time with Kimberly Powell, Nvidia’s vice-president of health care. And on Thursday, Reuters reported he had a relationship with a second employee.

Mr. Huang has been synonymous with Nvidia and with the AI industry as a whole. His resignation creates uncertainty not only about Nvidia, but about the pace of AI infrastructure spending, which is expected to reach US$7.6-trillion within the next five years, according to an April report from Goldman Sachs.

Some analysts argue that Nvidia has played an outsized role in driving AI expenditures. Under Mr. Huang, Nvidia has invested billions of dollars into some of its own customers, helping to fuel spending on AI data centres and stimulating demand for its own chips.

Now that he’s gone, the big question is whether Nvidia is prepared to continue spending big to keep the AI boom going.

“The threat for Nvidia and its AI ecosystem is that the cash may cease to flow,” Michael Burry, who is renowned for betting against the U.S. housing market ahead of the 2008 financial crisis, wrote on his Substack. “New investments will be tentative, if at all. There may even be write-offs.”

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Mr. Huang’s departure could arguably not have come at a worse time. Stocks tied to AI development had been sliding even before the Nvidia scandal, reflecting some investors’ and analysts’ concerns about the massive spending on data centres to fuel AI development and the financial returns needed to justify it. The Democratic sweep of the midterm elections in the U.S. earlier this month elevated worries of more stringent AI regulations and a slowdown in data centre construction.

Nvidia’s share price had fallen more than 5 per cent by Thursday afternoon, and it is down about 12 per cent year-to-date.

Nvidia has financially backed the AI industry through circular financing agreements, such as equity investments and deals to repurchase compute capacity from smaller cloud providers. In February, Nvidia sunk US$30-billion into OpenAI, which heavily relies on the company’s chips for its AI models, and has provided a guarantee of up to US$105-billion to help OpenAI lease space in a data centre in Ohio.

Nvidia has partnered with six financial institutions, including Brookfield Corp., to raise up to US$500-billion for AI infrastructure. It owns stakes in AI cloud providers Nebius Group and CoreWeave Inc., and has backed a range of other companies, including Cohere Inc. and autonomous vehicle startup Waabi Innovation Inc., as well as Elon Musk’s Space Exploration Technologies Corp., and Safe Superintelligence Inc., which was started by OpenAI cofounder Ilya Sutskever.

“Nvidia has been the one driving a lot of this build out,” said Benjamin Butler, an analyst with Veritas Investment Research. “If they aren’t providing financing, can a lot of these companies, like Nebius, CoreWeave and OpenAI, continue to fund this build out to the extent that they have been doing? I argue that they cannot.”

Peter Berezin, chief economist at BCA Research, said that Nvidia’s interim CEO may have a more conservative approach to financing deals given her background as CFO. “There’s a question mark as to whether the incoming CEO will have the guns blazing attitude that Jensen Huang had,” he said.

Should Nvidia curtail its spending, smaller cloud companies could struggle to raise capital to buy chips and operate new data centres. “There was just more demand for chips that Nvidia itself generated through its policies than there would have been otherwise,” Mr. Berezin said. Shares in Nebius were down more than 17 per cent as of midday Thursday, while CoreWeave had fallen by 7 per cent.

Large tech companies building data centres, such as Meta Platforms Inc., could benefit from a greater supply of chips and lower prices, he said, adding that the overall result would still be lower stock market growth.

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But other analysts don’t expect Nvidia to retreat from its strategy of investing in and financing customers, even though it was closely associated with Mr. Huang.

Matthew Bryson, managing director for equity research at Wedbush Securities, said Nvidia is likely to continue its investment strategy under new leadership, because it needs to ensure that the developers that are “pushing the frontiers of technology” are using its products.

It also needs to guard against the trend of cloud and AI giants increasingly developing their own competing chips, Mr. Bryson said. “It’s in the best interest of Nvidia to continue to do this.”

Mr. Berezin argued that the AI spending boom is already in its final innings, in part because he expects the chip shortages to start to ease. “The big risk for the whole AI trade is it becomes highly commoditized,” he said. “These AI companies end up being a little bit like airlines, which are indispensable for global commerce but never really make a lot of money.”

Other analysts are optimistic about the pace of AI spending. Daniel Ives, senior managing director at Yorkville Ives and Co., wrote on Thursday that Nvidia’s technology is at least two or three years ahead of its nearest competitors, and companies are still in need of its chips. “The demand trajectory the next few years is not changing because Jensen is gone,” he wrote.