Key takeaways:
- Founder succession creates uncertainty, not a change in the AI thesis: Jensen Huang has been central to Nvidia’s strategy and culture, but the company has an established technology roadmap and a deeply entrenched position in the AI ecosystem.
- Fundamentals remain the key investment consideration: In our view, Nvidia’s franchise, financial resources and long-term growth opportunity remain intact, although leadership uncertainty adds another variable for investors to assess.
- Active investors can look beyond the headline: The sell-off and leadership transition reinforce the importance of distinguishing short-term uncertainty from changes to long-term competitive positioning, while monitoring the new CEO’s approach to strategy, capital allocation and the wider AI ecosystem.
Nvidia announced that Jensen Huang has resigned as CEO with immediate effect. Current CFO, Colette Kress, will serve as interim CEO while the board searches for a permanent successor. Jenson has been CEO of Nvidia since its founding in 1993 and has like many technology founders personified the company as well as being the global AI luminary.
Jenson has been instrumental in the strategy of Nvidia making numerous prescient, long term bets that have enabled Nvidia to dominate the AI ecosystem. Launching their proprietary CUDA programming language in 2007, the acquisition of high-performance networking company Mellanox in 2020 – when married with their leading GPU technology – has allowed Nvidia to dominate AI infrastructure since the launch of their Hopper architecture just prior to ChatGPT’s viral launch in 2022. He has also been incredibly hands on as a CEO, befitting for what was until recently the largest company in the world but only employed 42,000 people. Jensen was also a leading advocate of AI, defining the technology’s roadmap as well as impact to the world and engaging with companies, governments and regulators globally.
The transition from founder led to professional management is a well-trodden path in the technology sector. Microsoft, Google, Apple and Amazon have all made that painful step over the years for a variety of reasons and have all been ultimately successful. Tesla/SpaceX and Meta are almost exceptions to the rule in terms of still being founder led. Nvidia has a well-developed roadmap through the end of the decade with their Feynman architecture and Kyber racks and has invested significantly in the supply chain to secure the capacity required for that roadmap and growth plans. Strategic moves have also been made in open-source models with the acquisition of Hugging Face this year.
Where next?
In our view, Nvidia’s future continues to look bright even without Jensen at the helm. Uncertainty will remain until a new CEO is appointed with the board considering internal as well as external candidate. Ian Buck, who leads their datacentre business, as well as Colette Kress are internal frontrunners while the role is clearly a major draw for almost everyone in the technology/AI industry. While they are big shoes to fill the company has the franchise and resources to attract the very highest calibre of executive.
The timing of the resignation also comes just after a major selloff in semiconductor stocks. As a result, the stock trades on a significant discount to the market and semiconductor sector, which has only been compounded by the company specific headlines in recent days. The company also has US$235bn of buyback authority to utilise during this volatility.
Other investment considerations that we cannot answer until a new CEO is appointed would concern the wider ecosystem. Nvidia has used its substantial cashflow generation to invest and backstop financing for the wider AI industry; will a new CEO be as committed to this external financing? What are Jensen’s plans post-resignation, for example starting a new AI/semiconductor venture creating new competition? And what implications does this have for US/China relations and ongoing debates on export restrictions post mid-terms?
Active investing: An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis and the investment choices they make. The opposite of passive investing.
Buyback: A repurchase of outstanding shares by a company to reduce the number of shares on the market and increase the value of remaining shares.
Cash flow: The net balance of cash that moves in and out of a company. Positive cash flow shows more money is moving in than out, while negative cash flow means more money is moving out than into the company.
Volatility: The rate and extent at which the price of a portfolio, security or index moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility, the higher the risk of the investment.