Author: Zhang Yaqi, Wall Street Journal

Top Wall Street brokerage Bernstein has downgraded Nvidia's stock rating from "Outperform" to "Market Perform," cutting the target price from $400 to $200. The reason for the downgrade was not a deterioration in fundamentals, but a management scandal that has engulfed the company's highest levels and is still ongoing.

Currently, the scandal concerning Nvidia CEO Jensen Huang is spreading, and the company's board has announced the initiation of an independent investigation. The Wall Street Journal further reported that the company is preparing to terminate him. Bernstein analyst Stacy A. Rasgon stated plainly in a report that, in light of the new allegations, it is nearly impossible for the board to allow Huang to remain in position; even if he stays, the ongoing risk of exposure is also significant.

Against this backdrop, Bernstein believes that although Nvidia's stock price has fallen to a "ridiculously undervalued" level, it still strongly recommends that investors sit on the sidelines for the time being. The company's fundamentals remain intact, but uncertainty has yet to clear—it's currently impossible to determine where the bottom of the negative news lies.

The scandal continues to brew, and the board finds itself in a difficult position

The catalyst for this event was a media report that emerged last weekend: Huang had an improper relationship with Alice Huang. Jensen Huang publicly acknowledged this relationship on Sunday, and Nvidia's board promptly announced the start of an independent investigation.

However, the situation rapidly escalated. According to recent reports, Huang also had an inappropriate relationship with a direct subordinate, allegedly the company's Vice President of Healthcare, Kimberly Powell. Nvidia is currently preparing to dismiss her.

In this regard, Bernstein assesses that some CEOs have been terminated for much less significant reasons. After the new allegations surfaced, the likelihood of the board retaining Jensen Huang is extremely low; if the board chooses to remain inactive at this time, it would mean that more scandals surfacing is just a matter of time, and the risk will further compound.

Solid fundamentals, but uncertainty cannot be priced

Bernstein emphasizes that this downgrade is not due to a pessimistic assessment of Nvidia's business prospects. According to its latest forecasts, the company's data center business growth trajectory remains steep—data center revenue is expected to be approximately $378.3 billion in fiscal year 2026, further climbing to $657.8 billion in fiscal year 2027, and it is anticipated to exceed $918.2 billion in fiscal year 2028. Overall revenue is expected to grow from $406.9 billion in fiscal year 2026 to $690.3 billion in fiscal year 2027, with an annual growth rate of nearly 70%. Regarding earnings per share, Bernstein expects an average non-GAAP earnings of $19.04 for fiscal years 2027/2028 (FY28/29) and sets the target price at $200, corresponding to about 11 times the forward P/E ratio, significantly lower than the previous 21 times valuation multiple.

The report points out that during the management transition period, the company's daily operations should not be significantly disrupted. However, what truly troubles analysts is the issue of succession. "Promotion from within or an external hire? Who can they find to replace Jensen Huang?"—these questions currently have no answers, and any emergence of answers will introduce new variables to the market.

"Cockroaches in the Kitchen": Negative news may not have hit the bottom

Bernstein used a vivid metaphor in the report to explain its core logic: If you find two cockroaches in the kitchen, the most reasonable inference is not that there are only two cockroaches in the entire kitchen.

Based on this judgment, analysts believe that the scandals currently emerging are likely just the tip of the iceberg. Future developments may include not only more internal accusations but also potential government investigations, as well as a series of uncertainties at the business level caused by this— including the fate of Nvidia's previous significant strategic investments in the supply chain, various guarantees, and remaining commitments, all facing uncertainty. At the same time, some competitors' stocks have recently risen due to related news and may continue to benefit.

Rasgon candidly admitted in the report that he himself feels "rather conflicted" regarding this judgment, fully understanding the logic of buying on dips. But his intuition tells him that the depth of this situation has yet to be fully explored. For this reason, Bernstein has chosen to temporarily withdraw and observe from the sidelines.

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