There are plenty of ways to lose money in the stock market. Buying at the wrong price, getting caught in an earnings disappointment, or discovering that the company’s much-celebrated growth story was perhaps a little more fiction than fact.

And then, of course, there’s the rather less conventional approach of having your CEO become the headline for all the wrong reasons.

But occasionally, the risk comes from somewhere rather unexpected. And this week, Nvidia has found itself in precisely that situation.

The world’s most valuable AI chipmaker is already navigating a difficult period for technology stocks, with investors beginning to question the enormous sums being poured into artificial intelligence. Its share price has come under pressure following a broader sell-off in AI-related stocks, which gathered pace after last week’s US midterm results and renewed concerns about the sustainability of the AI investment boom.

However, Nvidia now has another rather uncomfortable headline to contend with, and this time it has very little to do with semiconductor technology.

The man at the top is making the headlines.

Nvidia’s founder and CEO, Jensen Huang, has acknowledged having an affair with a business executive, Alice Huang, who has reportedly been identified by US authorities as a Chinese intelligence asset. The allegations suggest she may have been involved in gathering information for Beijing.

Huang has admitted being unfaithful to his wife and apologised to his family and colleagues. Nvidia’s board has subsequently launched an independent investigation into whether its CEO was targeted by a foreign intelligence operation.

Importantly, Nvidia has stated that it has no reason to believe company secrets or US national security information were compromised, and Huang has committed to cooperating with the investigation.

Nevertheless, the story has introduced an entirely new layer of uncertainty for investors, and Nvidia shares have come under further pressure in out-of-hours trading.

And perhaps this is where the story becomes particularly interesting from an investment perspective.

When the CEO becomes part of the risk assessment

Investors spend an enormous amount of time analysing company financials. Revenue growth, profit margins, cash flow, debt levels and future earnings forecasts all play an important role in determining whether a company deserves a place in a portfolio.

But how much attention is given to the individual responsible for running the business?

Investors are usually very good at examining the numbers. They’ll scrutinise a balance sheet until the last decimal point starts feeling uncomfortable. Yet the person making the decisions can sometimes receive considerably less attention.

Jensen Huang is not simply another CEO. He is arguably one of the most influential figures in the technology industry and has become almost synonymous with the AI revolution itself.

His leadership, vision and ability to position Nvidia at the centre of the global AI boom have been instrumental in its extraordinary rise.

That creates an interesting dynamic. When a CEO becomes so closely associated with a company’s success, their reputation and personal credibility can become part of the investment story.

And that can work both ways.

A CEO who inspires confidence can help attract investors, customers and talented employees. Conversely, questions surrounding their judgement, conduct or exposure to external risks can create uncertainty, even when the underlying business remains fundamentally strong.

This is what investors should recognise as key-person risk.

The bigger picture: Nvidia has enough on its plate already.

The timing could hardly be more awkward.

Just when investors thought Nvidia had enough on its plate trying to justify its enormous valuation, along comes another headache. Clearly, running the world’s leading AI chipmaker wasn’t keeping everyone busy enough.

The AI trade has been showing signs of strain, with investors increasingly questioning whether the extraordinary levels of capital expenditure on data centres, chips and computing infrastructure can continue at the current pace.

Last week’s sharp sell-off highlighted just how quickly sentiment can change. The Nasdaq fell around 5.5% in a single session, while Nvidia lost approximately 9%.

The midterm results have added another political dimension, with investors considering whether increased scrutiny and potential resistance to the expansion of AI infrastructure could create further obstacles for the industry.

None of this necessarily means the AI revolution is ending abruptly. Nvidia remains a hugely important player in an industry that continues to attract enormous investment.

However, when a company is already facing questions about its valuation, future growth and the sustainability of demand, an additional governance investigation is hardly the sort of headline investors were hoping to see.

And with Nvidia’s next quarterly earnings announcement approaching, the market has another reason to pay close attention.

A lesson that goes beyond Nvidia

There is a broader lesson here, and one that applies well beyond the technology sector.

Investing is not simply about buying a collection of numbers on a spreadsheet. Behind every company are people making decisions, setting strategy and ultimately determining whether the business succeeds or fails.

A company can have impressive financials, market-leading technology and an attractive growth outlook, but investors should never overlook the importance of the people running it.

Corporate governance, leadership, reputation and succession planning all deserve a place in the investment equation.

Of course, this doesn’t mean investors should immediately abandon a company whenever its CEO makes an unwelcome appearance in the headlines. Nor does it mean Nvidia’s underlying business has suddenly become less competitive.

But it does demonstrate why looking beyond the balance sheet matters.

After all, you can spend hours analysing a company’s earnings, scrutinising its cash flow and calculating its future valuation. Yet sometimes, the biggest risk isn’t buried somewhere in the accounts.

It’s sitting in the big chair at the top.

And unlike a questionable quarterly forecast, that’s not something you can fix with a little creative accounting.

By James Trescothick
Head of Market Research and Market Analysis

Risk Disclaimer: This information is for educational purposes only and does not constitute investment advice. Financial markets involve risks, and past performance is not indicative of future results. Always conduct your own research and seek professional advice before making investment decisions.