Are AMD and Broadcom the real winners of the Nvidia spy scandal?

By William Gavin and Hannah Pedone

The chip makers' shares were posting big gains Monday - but those companies could also be subject to greater scrutiny over their sales practices, analysts say

Broadcom shares were rising on Monday.

The broiling scandal surrounding Jensen Huang's affair with an alleged Chinese spy may be bad news for Nvidia - but investors see it as an opportunity for its rivals.

Nvidia is probing whether Huang was targeted as part of a foreign-intelligence scheme, but said he will stay on as CEO "without interruption" and that business momentum won't slow down.

Investors don't appear as certain.

Shares of Nvidia (NVDA) were down more than 5% in midday action on Monday, adding to recent losses. The company was on track to shed $224 billion in market capitalization on Monday alone and $1.49 trillion across the last 24 trading days. The latter would be a record for any U.S. company, according to Dow Jones Market Data.

Meanwhile, shares of Nvidia rivals Advanced Micro Devices (AMD) and Broadcom (AVGO) were up 11% and 8%, respectively. Monday is set to be Broadcom's best day since it announced a big deal with Google parent Alphabet (GOOG) (GOOGL) last November, per Dow Jones Market Data.

Other chip stocks were also rising Monday, with the PHLX Semiconductor Index SOX up 6.4% in recent action. Nvidia was the only stock in the SOX index trading lower on the day.

The rally in the chip sector in response to the news adds to a recovery that was underway last week following a selloff in the wake of the midterm elections, Sentara Capital founder Will Allen told MarketWatch.

"This really is possibly the biggest story of the year," he said. "Nvidia really has been driving the bus for AI."

Seaport Research analyst Jay Goldberg told MarketWatch that companies like AMD and Broadcom likely "are going to start adding honeypot training" as a measure of security beyond existing protocols governing electronics usage in China. He added that "every company is at risk of this."

Broadcom and AMD did not immediately return requests for comment.

Morningstar analyst Brian Colello told MarketWatch that all U.S. vendors and suppliers in the artificial-intelligence ecosystem will be under growing scrutiny in the coming months in the wake of the scandal, and will have to ramp up efforts to protect themselves against outside influence and maintain compliance with U.S. laws.

That said, he believes that Nvidia's dominance in the market for GPUs means it is "the most important company for China to work with and thus gain information and support."

"We can't rule out any tactics against other companies, but Nvidia's market dominance gives it the biggest bullseye," Colello said.

Don't miss: There is no one at Nvidia who would be ready to replace Jensen Huang

The heightened scrutiny of Huang may start with Nvidia's internal investigation, but it won't stop there. U.S. senators on both sides of the political aisle have called for an investigation, while a few House of Representatives committees have asked Huang to brief them on his relationship with Alice Huang, a former executive at Singapore-based Megaspeed.

Megaspeed buys AI chips from Nvidia and is being investigated by the U.S. over claims it helped Chinese firms circumvent export restrictions. Jensen Huang told Bloomberg recently that Nvidia did not find evidence that Megaspeed had sold its chips to Chinese buyers.

Chinese buyers have reportedly turned to intermediaries and indirect purchases to access Nvidia chips as both the U.S. and China maintain constraints. The Megaspeed scandal - which follows allegations from earlier this year that a Super Micro Computer (SMCI) executive dodged U.S. export rules to divert Nvidia's chips to Chinese firms - could make additional restrictions popular.

Raymond James analyst Ed Mills pointed to the MATCH Act, a bipartisan Senate proposal that would further limit sales of semiconductor manufacturing equipment to China, as well as other proposed legislation. He said in a client note that export restrictions are a "top priority" for Democrats, which last week won enough seats for a majority in both chambers of Congress.

"We have legislation ready to go to stop advanced AI chips from fueling China's military," Sen. Elizabeth Warren, a Democrat from Massachusetts, wrote Monday on X. "Let's get this done."

That could be a blow for Nvidia and its CEO, who has advocated for less stringent restrictions on sales of graphics processing units to Chinese customers. Sales to China accounted for 8% of Nvidia's revenue in the quarter that ended on July 26 - down from 28% in the October quarter of 2022 due to tighter export rules, according to Bernstein estimates.

Nvidia and AMD each sell some older chips to customers in China, such as Nvidia's H20 and H200 series and AMD's MI308 chips. Broadcom and Nvidia also sell high-end switches for use in Chinese data centers, though Chinese regulators are reviewing its dependence on Broadcom, according to the Financial Times.

-William Gavin -Hannah Pedone

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11-09-26 1333ET