On October 6, Nvidia's valuation reached an all-time high of approximately $5.77 trillion. At market close yesterday, their market capitalization was down to approximately $3.92 trillion. That drop is roughly equivalent to the GDP of a big country, like Australia, South Korea, or Spain. So while the media was happily gossiping about the sexual affairs of Nvidia CEO Jensen Huang, I got the feeling that they were all talking about the wrong story. To me, there is nothing surprising to a billionaire wanting to use his wealth and power to get sex, or him being unfaithful to his wife. There is something surprising to the sex affairs of a single man getting revealed wiping out the economic equivalent of Australia.

If you look at the whole thing a bit closer, and past the sex part, I would describe the problem as a concentration risk. Too much of the economy is concentrated in a few companies like Nvidia. And too much of the control of a company like Nvidia is concentrated in a single fallible person. We are talking of an economy in which let's say the accidental death of Elon Musk would very likely cost the stock markets several trillion dollars.

Now the economic concentration into large companies I get, it is an inherent, if flawed, feature of capitalism. Every company wants to grow, and if it can grow into trillion dollar territory, why wouldn't it want to? The concentration within a company on the CEO is a lot more questionable. A typical CEO has 6 to 10 direct reports. That means the CEO can have a meeting of manageable size with all of his direct supports, and thus they each know at least something of what the others are doing. Jensen Huang had 60 direct supports. Kudos to him for being able to manage a company like that successfully for over 30 years, but the chance of finding somebody able to do the same in the same way are slim. And each of the 60 direct supports has a much lower power base within the company and knowledge of the overall picture than if there had been just 6. Nvidia didn't even have a formal succession plan for Huang.

Of course the loss of value of Nvidia is due to a mix of things, including worries that now politics steps in to better block chip sales to China via intermediaries, or general fear of an AI bubble. But having a $5.77 trillion company in which all power is concentrated into one man, with no plan B if anything happens to that one man, sounds like gross economic mismanagement to me. A huge concentration risk that didn't get managed at all. Nvidia is objectively worth much less today than last month, due to having decided to not manage that concentration risk.

- posted by Tobold @ 1:34 PM Permanent Link