Steadier hands could be better suited to enriching investors as the company enters a new phase
By Asa Fitch
Jensen Huang may have shepherded Nvidia through a period of unprecedented growth, but the ways he put the company's cash to work have justifiably raised eyebrows.
Whoever follows him in the CEO's seat will have an opportunity to change course, likely to the betterment of shareholders.
Huang's ouster at the top of the world's leading AI chip company sent Nvidia's stock 4% lower in early trading Thursday. The stock is down 22% since a New York Times report late last month about Huang's relationship with a woman suspected of being a Chinese spy. It was already underperforming even before that as investors fretted about its central position in the AI trade.
Commercially, though, Nvidia remains on solid footing, and will likely remain so for quite a while even without Huang.
Nvidia is deeply ensconced as a supplier to the big tech companies and AI labs spending hundreds of billions of dollars each year on AI computing. Nvidia software that controls how chips process AI calculations is dominant and ubiquitous, giving it a strong competitive moat. It plans future AI chips and computing systems years in advance, meaning Huang's absence won't have much of a near-term impact on its products.
Nvidia finance chief Colette Kress, who the company's board appointed as interim CEO on Thursday, said in August that revenue for the fiscal year ending in early 2028 is expected to grow 70%. Although that would be a slower growth rate than the previous year, it would add around $287 billion of revenue at gross profit margins expected to be above 70%.
And the company isn't expecting the supply of its AI chips to come into balance with demand any time soon.
"Although we will work to close the supply-demand gap, we expect supply to remain a bottleneck at least through the end of fiscal year '28," Kress said.
That means Nvidia is going to be a profit- and cash-generating machine for the foreseeable future. Analysts expect the company to generate about $261 billion of free cash flow over four quarters, starting with the one it is set to report next week, according to FactSet. That will add to a cash pile that totaled nearly $100 billion in the company's last reported quarter.
Huang's successor will have an immediate impact in deciding how all that cash is spent. In this case, the absence of his influence may prove to be a positive development for the stock.
Huang's answer to the cash buildup was to spend liberally, becoming a financial backer for the broader AI ecosystem. He invested billions of dollars in equity stakes in customers and suppliers, and entered into circular financing deals and residual-value guarantees. Those things could help pad the company's future revenue, but also put its healthy balance sheet at considerable risk.
Donald Trump on Thursday called for Tim Cook to replace Huang. That is unlikely, but there is an intriguing parallel there.
Nvidia's position is in many ways analogous to that of Apple when Steve Jobs departed in 2011. Apple then was sitting on a huge cash pile -- about $81.5 billion of cash and marketable securities. Jobs felt keeping the cash was necessary to fund innovation and keep the company's options open. When Cook took over, he aggressively returned money to shareholders through share buybacks and dividends, which Jobs had shunned.
The results were resoundingly positive. Apple's total return, including reinvested dividends, was north of 2,700% in Cook's 15-year tenure as chief executive. The S&P 500 only returned roughly 750% over that period.
Nvidia has ramped up buybacks considerably under Huang in recent years. The company bought back $40 billion of shares in the past couple quarters, and in September increased authorized buybacks to $235 billion through the 2028 fiscal year.
Much depends on who replaces Huang at Nvidia's helm, but it is possible if not likely that the successor will hand even more of the company's cash back to shareholders, eschewing the creative financing deals and investments that had been a hallmark of Huang's risk-happy tenure.
Kress may get the role on a permanent basis or, as seems more likely, it could go to an internal technical leader like Ian Buck, who was instrumental in putting Nvidia on the path to dominating AI computing. Either way, it is hard to imagine the board and new management staying Huang's financial course.
Such a change could be disruptive. Any wind-down of support to partners and customers could slow revenue growth, and would have to be carefully managed so as not to trigger feedback losses onto Nvidia's own balance sheet. But it would ultimately be more prudent for a company that is transitioning out of its era of skyrocketing growth. The all-out scramble for compute is starting to fade, ushering in a period where Huang's salesmanship will be less important, and prudently managing a large, vital enterprise becomes paramount.
UBS analyst Tim Arcuri estimated in a note that an Nvidia financing pullback could easily take $50 billion or more out of the system at a time when interest rates are rising and it isn't as easy for AI players to borrow. But continuing to satisfy artificial demand for chips could also magnify the ultimate pain for Nvidia should demand among end users eventually stall. The AI economy was always going to have to stand on its own at some point.
Considering its potential to increase shareholder payouts, Nvidia looks cheap: It currently trades at less than 12 times forward earnings -- its lowest point in decades. Its free cash flow yield is also at a historic high, generating around $7 of free cash flow in the coming year for every $100 invested.
The stock could easily fall further as more details emerge about Huang's personal conduct and possible export control failures, posing a challenge for investors looking for an entry point.
Beatdown though it looks, though, Nvidia may be in better position without Huang than with him.