Super Micro Computer: Navigating AI Hype, Short Seller Allegations, and Market Volatility

Super Micro: A Lesson In Big Multiples (NASDAQ:SMCI)

Given the uncertainties and need for audited financials, I rate SMCI stock a Hold. Super Micro Computer (NASDAQ:SMCI) is known as a leader in IT solutions, more recently for data centers since last year's dawn of the AI boom boosted this demand. A recent report by the famed Hindenburg Research accused the company of inaccurate financial reporting as a result of questionable sales practices. The market price of SMCI has fallen about 20% since the release of that report. Even so, prior gains put the shares up almost 50% since the start of the year. Many investors, particularly those eyeballing good stocks for the long-term benefit of the AI boom, may wonder if the stock is undervalued after this correction or not. I believe Hindenburg, while unearthing some details, mostly just reminded us of the issues that made pricing this stock too high a bad idea in the first place. Considering the financial history of the company, their shares are likely priced on the upper end of a fair value. Even after this dip, I can't see them being better than a Hold until the fundamentals improve, risks are clarified, or a better entry price is offered. Normally, I would cite the previous decade's worth of financial results, but as Hindenburg shed reasonable doubt on the results and as Super Micro is still delaying to release their Form 10K, I've omitted their most recent fiscal year for now and will discuss that separately. Charts show data for fiscal years ending in June. The tale of the last decade has largely been one of growth for SMCI. Even before the boost in revenues for FY 2023's results, the company has come a long way in growth. We may note that growth paused after FY 2018. This was the same period in which SMCI was temporarily de-listed from NASDAQ for similar failures to report financial results promptly. Additionally, a report by Bloomberg, citing its belief that Super Micro's motherboards exposed its customers to Chinese cybersecurity risks, further challenged the company's reputation and may have been a reason for stagnant sales. The company consistently disputed those claims. When we get to free cash flow, we see a mixed picture, wherein Super Micro regularly alternates between positive and negative FCF. Since revenues stayed flat or grew, and since capex was a very small percentage of revenues during this period, the main factors have been shifts in operating expenses, as well as in working capital. Average annual FCF from 2019 to 2023 was $74M. Of course, 2023 came with a meteoric $627M, so it depends on whether or not we believe that sets a new baseline or is just part of the fluctuations I mentioned. Now let's discuss FY 2024. While the release of the 10K is delayed, they nevertheless produced an initial release of Q4/FY results in advance of their earnings call last month. This included a record $14.9B in annual revenue, alongside significant cash outflows. Depicted above, that's an outflow of about $2.5B on just the operating cash flows. If we look to their most recent SEC filing for Q3, we can also see that capex shot up. Often in the range of about $30M to $50M in any given year, they've already reported it spiking above $110M. The main impact from these outflows was accumulation of inventories. The shift of net cash from positive to negative also indicates that Super Micro took on additional debt to finance these efforts, seen with its issuance of convertible notes. The terms of these notes (Form 10Q, pg. 19) are rather favorable: they bear no interest, are due 2029, and require strong gains in SMCI to be worth converting. Of course, it's worth remembering that 10Qs are unaudited, and Hindenburg's dispute with the accuracy of the upcoming (and now delayed) 10K would include the three quarters disclosed up to this point. The reason I focused so much on the history of financial results here is because, whatever we think of Hindenburg's recent report, Super Micro has a long operating history. Inaccurate reporting does not necessarily indicate a troubled operation if the difference is only marginal. I want to think about the business for what it is, and then consider the problems raised by Hindenburg. We pay cash to own shares of Super Micro, so we want to know what kind of cash it can generate. While average FCF prior to FY 2024 was $74M, the record level of inventories built up (over $4B) suggests that an average of about $500M is possible, taking into account the possible fluctuations in expenses and working capital that I highlighted before. (This is a general figure, as I don't think it's quite possible to anticipate all the fluctuations well in the highly evolving data center market.) If we start out with mostly positive assumptions, such as a CAGR for this $500M of 20% and 15% for each half of the next decade, ending on a terminal multiple of 20, that gets us a valuation close to the current price of SMCI at a 10% discount rate (to compare it a typical return of a market index). How confident should we feel about this? While AI is a booming business, some roles to play are more competitive than others. Nvidia (NVDA), for example, has been rewarded with explosive share growth because its GPUs give it superior tech, and their gross margins point to pricing power and lack of serious competition that come with this. A lot more people have a role to play on the data center side. If we look at SMCI's gross margins, it doesn't bode as well. The company reports its gross margins being down from 17% in the prior-year quarter to 11.3% now. It cites "initial production costs" here, and that's not surprising if they are trying to ramp up for this expanding data center market. Having said that, I can easily anticipate that there will be a lot of "initial production costs" each year as they and their competitors attempt to scale and keep up with each other. This includes other established tech brands like Hewlett Packard (HPE) and Dell (DELL) who offer similar products. (The latter I've covered before.) As nobody can really haggle with Nvidia on price, the pressure to haggle down the chain increases. To my eye, no company really has a "secret sauce" when it comes to data centers, just different layers to their product to make a deal seem worth it. All of this is to say that sustained growth of 20% to 15% for a decade out of that $500M baseline isn't impossible; it just likely represents a fair value of what we could expect when competition will squeeze margins and create pressure for reinvestment. Representing a hypothetical multiple of almost 50, the $420s doesn't suggest a margin of safety. How seriously to take this research report? Not just anybody can double-check it. For example, they claim that most of the staff outed from the 2020 fraud case were rehired in some capacity. These salesmen were pressured to over-report recognized revenue through invoicing orders that were not needed by customers. If we recall the financing provided by the convertible notes, This provides a plausible incentive for trying to report the best possible numbers on a quarterly basis, as Hindenburg alleges. At zero percent interest, the convertible notes are very cheap capital. I'll also highlight the conversion terms detailed in their 10Q: Holders may convert their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2024, if the last reported sale price per share of the Company's common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the "measurement period") in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of Company's common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company's common stock, as described in the Indenture; (4) if the Company calls such notes for redemption; and (5) at any time from, and including, September 1, 2028 until the close of business on the second scheduled trading day immediately before the maturity date. These terms are more restrictive than I am used to seeing, especially #1. The conversion price is $1,341.38, and in order to convert sooner, one would need more than a 30% premium on the market ($1,743.79). The all-time high was just shy of $1,200 in the spring. With zero-percent interest, I see the convertible notes as more practically an equity raise. Buyers of such a restrictive issue really need to believe in the upside of the stock. A NASDAQ de-listing is an additional threat I see coming from this, as they are once again mired in delayed reporting, as occurred in 2018. Even if the operations are not seriously misreported, there's the loss of liquidity that an OTC stock could pose for today's buyers and, with it, potential capital losses. I'll let folks look at the details in the report if they want to see everything Hindenburg mentioned. I'm merely focusing on what, I think, could be the consequences and why they steer me away. Super Micro isn't about to go out of business, but there is a question on its lofty valuation of over $25 billion when free cash flow is currently negative and historically not often in the hundreds of millions. The rise of AI and demand for SMCI's product for data centers are a potential source of revenue growth, but recent allegations by Hindenburg, related to past struggles with prudent reporting, cast reasonable doubt on the volume of that growth. Even if SMCI's numbers are to be believed, they show shrinking margins, and competitors may squeeze those further. The current price may be a fair one for the optimistic story, but weaker financials and potential for de-listing on NASDAQ could pull the stock the other way. Even with a correction, these factors force me to want a much wider margin of safety for an entry price or at least a Form 10K with audited financial data. Until then, the best SMCI deserves at this moment is a Hold rating.

Super Micro Computer Stock: My Skepticism Was Justified (NASDAQ:SMCI)

The stock is not a bargain despite the situation Super Micro Computer is in. Super Micro Computer (NASDAQ:SMCI) stock used to be a growth rock star for a while. The company used to have a sound balance sheet, surging sales and rising earnings. However, the stock was also associated with excessive investors' enthusiasm. It was highly expensive and used to appreciate at a very high pace for a while. Yet, 2024 has been rather uneven for the company and its shareholders. The company's shares have also recently plunged after the publication of a report from Hindenburg Research. In my previous article about Super Micro Computer's stock, I wrote that the stock was performing exceptionally well, thanks to the AI hype. I also noted the company's surging sales as well as popularity among investors. The company's financial position also seemed stable thanks to the strong balance sheet indicators SMCI reported at the time. However, I also noted the stock's overvaluation and wrote that it was not worth investors' money. Well, I was right, it seems. Only the company's cash position has also deteriorated somewhat. Since my last coverage, the stock has plunged by almost 55% versus the S&P 500's gain of almost 8% as of the time of writing. So, why did it happen? In other words, why did the stock of a profitable and seemingly financially stable company plunge? As you can see from the graph below; in 2024, SMCI touched a high of about $1200 per share. As of the time of writing, it is hovering near $438 per share. Here is why that happened. Super Micro Computer announced that it would not timely file its annual report for the fiscal year ended on June 30, 2024; because additional time was needed for the company's management to complete its "assessment of the design and operating effectiveness of its internal controls over financial reporting" as of June 30, 2024. SMCI has not updated its results for the fiscal year and quarter ended June 30, 2024 that were announced in SMCI's press release dated August 6, 2024. This is a very rare situation, indeed, that a successful company like SMCI would delay the filing of its annual report. Super Micro's management is also reviewing the company's system of internal controls, which means a lot of uncertainty for SMCI. Even if we assume that the company's results are perfectly accurate, SMCI's earnings, its financial fundamentals, and its valuations still raise questions. In my previous work on SMCI's results, I also wrote about the company's relatively low profit margins, namely the company's gross and net profits relative to sales. Well, these have only gotten lower in the recent couple of quarters. But the worst problems Super Micro Computer is facing are its cash and debt issues, and also its desire to fuel excessive sales growth. As I mentioned in my previous analysis, SMCI's revenues surged by almost 500% between 2021 and 2023, with its average annual growth rate totaling 250% over the period. I not only questioned the sustainability of these results, but also noted that the record-breaking growth rate was not enough to justify the company's unbelievable stock price surge. When I published my last article about SMCI, the company had negative net debt (calculated by subtracting a company's total cash and cash equivalents from its total debt), meaning that it was a cash cow with little debt. Right now, according to the company's accounts, the situation is completely different. Now the net debt is near multi-year highs. This is mostly due to the negative change in cash. The company's cash decreased by $445.7 million in the June 2024 quarter. The materially negative cash flows were due to higher costs and therefore lower profit margins. The table below shows SMCI's profit margins and compares these to its competitors. One would expect a highly popular company with growing sales to post better results compared to its rivals. But in fact, SMCI has the worst figures compared to its peers. For example, Western Digital Company (WDC), Hewlett Packard Company (HPE), Pure Storage (PSTG) and Dell (DELL) all have higher gross profit margins than SMCI. But let us also have a look at the company's sales and profit trends. SMCI's quarterly revenue history (the data are given in $million) Source: Prepared by the author based on Seeking Alpha's data We can see that the revenue growth has been exponential and started surging after the March 2023 quarter. SMCI's quarterly revenue history (the data are given in $million) But very high sales growth rates tend to be unsustainable. Despite the surging revenues, the net profit growth has faded. In the June 2024 quarter, the net income even decreased quarter-on-quarter compared to the March 2024 results. SMCI's quarterly net income history (the data are given in $million) Source: Prepared by the author based on Seeking Alpha's data SMCI's quarterly net income history (the data are given in $million) In other words, the company might indeed fuel extreme revenue growth at the expense of cash and profitability, even if we assume no inaccuracies in SMCI's accounts. One would expect that after the major stock price correction, the stock is adequately priced given the numerous risks. But it does not seem to be the case. Well, to start with, despite the uncertainty surrounding SMCI's stock, the market still remains quite optimistic. As you can see from the table below showing SMCI's valuation ratios, most of its valuation ratios, including price-to-earnings, EV/Sales, and P/S ratios, are in line with its peers, including Dell and HP (HPQ). In other words, it seems that the market does not assume major problems are ahead for SMCI. At the same time, if we see the graph below, we will see that the company's valuation ratios have substantially decreased. But if we compare the company's valuation ratios to its peers, we will see that they are now quite average. This means that the stock was overvalued in the past and is now quite in line with its competitors' valuation ratios. But the market still does not assume SMCI is facing any substantial problems given its current valuations. Otherwise, the stock would have cost much less than its peers. I usually try to avoid jumping to conclusions or saying a certain stock is an immediate sell or a certain buy. I rate SMCI as a "hold," assuming there is a possibility for its stock price to jump, if the audit discovers no problems with the company's internal controls. However, I agree the stock is still expensive given the circumstances; its profit margins are contracting, and cash flows are turning negative. SMCI stock is far too popular thanks to the AI hype, but I would not sell it short either, due to any possible positive news and announcements.

Super Micro Computer: Be Wary Of AI Infrastructure Overbuild (SMCI)

Super Micro Computer (NASDAQ:SMCI) (NEOE:SMCI:CA), a leading provider of liquid-cooled server hardware and AI infrastructure, fell sharply last week after a research firm issued a short report, which followed an announcement detailing that Supermicro would not be able to file its 10-K on time for the fiscal year, ending on June 30, 2024. Additional time is needed for SMCI's management to complete its assessment of the design and operating effectiveness of its internal controls over financial reporting as of June 30, 2024. (Seeking Alpha) In addition, the stock was also dragged down by another major AI infrastructure provider, NVIDIA (NVDA), which, despite beating both revenue and earnings per share estimates after the release of second-quarter results, was still trading lower due to uncertainty about the sustainability of revenue in the future. We believe that the increasing uncertainty about the future sustainability of margins, along with recent concerns about a delay in filing reports and a possible overbuilding of AI infrastructure, warrant a sharp discount to SMCI's valuation, and therefore we currently maintain the stock at a "Sell" rating. First, in analyzing Supermicro, we have spotted a very noticeable divergence between cash flow metrics and operating income which deserves some attention, with cash flow from operations amounting to -$2.48BN, while operating income has remained positive at $1.27BN for the last 12 months. This difference is largely due to changes in net working capital, as inventories and accounts receivable have skyrocketed, while deferred revenue and accounts payable are down as a percentage of revenue. In short, it appears that SMCI is stockpiling inventory as revenue is scaling and is extending more credit to customers. In addition to rapidly growing accounts receivable, we also see higher inventory levels as a risk in a scenario in which demand for AI chips would unexpectedly decline, leading to less demand for SMCI's products and ultimately leading to a severe inventory glut/build-up that puts significant pressure on margins. This is also quite visible in the cash conversion cycle, which is a metric that according to Investopedia "expresses how many days the company takes to convert the cash spent on inventory back into cash from selling its product or service." In general, a shorter cash conversion cycle is better, since companies generally don't want cash tied up for long periods of time in accounts receivable or inventory. In SMCI's case, the cash conversion cycle has lengthened from 79.18 days in 2019 to now being 103.32 days. Another concern we found in reading SMCI's latest SEC filing is the fact that both accounts receivable and sales are very concentrated with a few key customers. According to the filing, one customer accounted for 21.2% of net sales and another accounted for 16.8% in the first three months ending 2024. When 38% of net sales are spread across 2 customers, which are likely Hyperscalers, we feel there is reason for caution. There was also a concentration in accounts receivable, which represents a concentration of credit risk for the company: Customer A accounted for 27.9%, customer E accounted for 18.1% and customer B accounted for 15.4% of accounts receivable, net as of March 31, 2024. Customer A accounted for 22.9% and customer B accounted for 19.3% of accounts receivable, net as of June 30, 2023. These accounts receivable represent a concentration of credit risk to the Company. (Form 10-Q, SEC) It's no surprise that the recent boom in revenue for SMCI was driven by the demand for AI compute and thus the infrastructure needed and provided by SMCI. The elephant in the room here, however, is SMCI's reliance on the ever-growing CapEx of hyperscalers and AI startups that is upfront in the expectation for future revenue streams. We recently mentioned this fact in our analysis of NVIDIA, in which we expected that the current infrastructure build-out would be justified if it required $600 billion in end-user application revenue, which we don't quite see yet. In general, as in previous infrastructure cycles, we think investors tend to be overly optimistic about future demand, leading to serious negative consequences for profit margins in the short to medium term. We think this time could be similar to the overbuilding of fiber optics in 2000, which led to many financial setbacks for hardware companies in the short to medium term, but resulted in the exponential growth of Big Tech in the long term. So while the outlook for demand for AI hardware, like NVIDIA, for example, seems pretty clear for this year and early 2025, we see a lot of uncertainty for demand from hyperscalers after that. This, along with the potential margin compression that could accompany a significant drop in demand. Currently, SMCI's gross margins are already quite weak and have fallen to a new low of 11.2%, which raises additional questions about pricing power in the future should demand decline. And given SMCI is quite dependent on Nvidia keeping the AI infrastructure spending ongoing, we also got some very intriguing data released as the company reported Q2 earnings on Wednesday, concerning the concentration of revenue which we could previously only make rough estimates of. Now it has become clear that 4 customers make up 46% of NVIDIA's revenue, with 5 customers highly likely making up more than half of revenue, highlighting the fragility of this rally and the dependence of NVIDIA upon these large customers, and their ability to drive end-user value. The multi-trillion dollar question upon which this AI rally is trading remains whether companies will ultimately be able to turn this massive build out in AI infrastructure into end-user demand. And while we see some tremendous AI adoption happening in certain places, like biotechnology, coding, customer support and autonomous driving, we're not seeing immensely impactful adoption yet across the board to justify the infrastructure spend. Even OpenAI, the poster child of AI, and one of the most widely used AI tools, has $3.4BN annual revenue and is expected to lose $5BN this year. According to an Ipsos survey, a "perceived lack of benefits" remains the biggest barrier currently to adoption of GenAI, with reliance being the second most important concern. We highlight these issues because we believe they will ultimately translate into a knock on effect for SMCI's margins, combined with the current inventory buildup. This is also not even speaking about the potential for heightened competitive pressures with providers like Dell (DELL), Lenovo (OTCPK:LNVGY) and HP (HPQ) competing for market share on top of these already highlighted threats. While we usually don't place an enormous weight on technical analysis, in the case of SMCI, we do see some eerily similar patterns to how previous bubbles have played out. To us, it seems like SMCI is following a classic double-top pattern, which is followed by a return to baseline. We believe one of these examples to be the ARK Innovation ETF (ARKK), which we displayed on the left side. The contrast to SMCI, which we displayed on the right side, is oddly similar. This isn't the first time that we've seen this bubble pattern, on the contrary, it was widely visible during the "everything bubble" in 2021, and involved stocks like Peloton (PTON), Zoom (ZM), Roku (ROKU), PayPal (PYPL) and others. Another time when we clearly saw this double-top pattern was in the dot-com bubble itself, in the NASDAQ 100-Index (NDX). One takeaway from all these bubbles that have followed an eerily similar pattern, is the fact that they end up returning to baseline, and end up trading there for a long time. It took the Nasdaq-100 a staggering 15 years to recover back to its previous highs reached in March 2000. Concerning SMCI, this would mean a return to its $240 baseline where it would bottom out, and which would be a significant drop from the current $448. In the short term, it does seem like SMCI could see a bounce given the extreme pessimism surrounding the stock, and recent serious selloff, along with heightened volatility given recent developments. Also, do note that short interest has also risen to 13.14% recently following the short report, which may prompt some short-covering rallies in the near term. Based on valuation, we believe a serious discount to SMCI's valuation is warranted given the increased uncertainty due to the previously mentioned concerns about delayed reporting and uncertainties in future demand growth and possible margin compression. This does not necessarily mean that the stock would not be investible, although we express our concerns. We believe that even in chaos, or a bubble in a downtrend, there is money to be made. As for SMCI, we believe there is still plenty of visibility that the company can meet demand this year, probably well into 2025. So on a 2025 EPS basis, we think a 10x multiple would be conservative, which translates to $343.30 per share at an EPS estimate of $34.33 for 2025. In that case, the technicals could be in line with the fundamentals at $340, at which point the stock would be back in the trading range where it started, as most bubbles tend to end, as indicated earlier. Another way to look at it is the fact that most previously mentioned "bubble stocks" such as PayPal and Zoom eventually bottomed out at a valuation of 10x EV/EBITDA on a trailing-12 months (TTM) basis. This would lead to an enterprise value of $13.05BN for SMCI, which after adding net debt of $504.38M would lead to a market cap of $13.55BN. With 58.69M shares outstanding, this would mean that SMCI could potentially find a bottom at $230.88, which again corresponds to the bottom of the trading range where "bubble stocks" usually end up. There is, of course, a chance that our statement is wrong, and that Supermicro is the exception to the trend. Moreover, Charles Liang, Chief Executive of Supermicro, responded this week to the delayed reporting and stated that in terms of impact: Importantly, however, when we announced the decision to delay our Annual Report filing, we indicated that based on the work done so far, we don't anticipate any material changes in our fourth quarter or fiscal year 2024 financial results. (SEC Filing) Regarding the report of the aforementioned hedge fund going short the stock, he added that they will "address these statements in due course" and the report contains "false or inaccurate statements about our company including misleading presentations of information that we have previously shared publicly". He also mentioned that neither the delay in reporting nor a report published by a short seller will affect customers and partners, which, we believe, can be seen as positive. Furthermore, if our thesis is wrong, we could see the upside scenario for Supermicro come true if the Hyperscalers' CapEx remains strong, or even increases, as they apparently still have the free cash flow to support current AI CapEx spending. Moreover, we believe that most of these Hyperscalers are also drastically looking for future growth areas, as growth is becoming increasingly difficult with Big Tech companies experiencing the law of large numbers, given that the Magnificent 7's combined valuation currently stands at $14.86 trillion. While short-term pessimism may be exaggerated and SMCI could experience a small rebound in the meantime, we remain cautious about the company's prospects and certain issues such as concerns about delayed reporting, especially given Supermicro has been previously delisted from the Nasdaq after failing to file financial reports in 2018 due to internal accounting control issues, and possible over-optimism in the short term with the build-out of its AI infrastructure. Unlike research firms that have openly voiced a desire to go short in the stock, we do not believe the stock presents an opportunity to go short, as we believe the case for going short is rather lackluster in this case. Still, we are avoiding the company because of the risks mentioned and give the stock a "Sell" rating, estimating that value can be found if it gets within the $230.88- $343.30 range. Seeking Alpha's Quant currently has SMCI between a "Sell" and a "Hold," viewing profitability, momentum, and revisions as negative and valuation and growth as positive.

Will Super Micro Stock Sink or Swim Amid Short Seller Allegations? | Investing.com UK

Priced at $451 per share, Super Micro Computer (NASDAQ:SMCI) stock has fallen into deep discount territory, both against the 52-week ceiling of $1,229 and the 52-week average of $606 per share. The culprit for SMCI's 30-day drop by 22% is the recent Hindenburg Research report. On August 27th, the investment research group disclosed a short position on SMCI stock based on the three-month investigation alleging "accounting red flags," suspect hiring practices, circumventing exports to Russia, and Super Micro's corporate culture. A day later, Supermicro delayed its Form 10-K filing to the SEC, which was supposed to show the company's annual report ending June 30th. Last Friday, on August 30th, this situation was compounded by DiCello Levitt LLP filing a class action lawsuit against Super Micro, alleging misleading reports on revenue growth and product demand. DiCello Levitt cites the Hindenburg Research report as the lawsuit's jumping ramp. But when all dust is settled, what is Supermicro's bottom line as a major supplier of data center servers? Despite the recent turmoil, SMCI shareholders are up 58% year-to-date. Is this a rare opportunity for investors to buy the proverbial dip? As the concluding reason for its short position, Hindenburg calls Supermicro a "serial recidivist." This reflects the report's focus on the company's past friction with regulatory agencies, specifically its temporary delisting from Nasdaq in 2018 for delaying financial statements and accounting violations in 2020. After the SEC's $17.5 million settlement, Hindenburg's researchers pointed out that Supermicro rehired the culprits for the accounting malpractice, which was relayed to them by former Supermicro employees. In turn, the company resumed its previous practices of "improper revenue recognition," including incomplete sales and circumventing internal accounting controls. There are also allegations of nepotism, as Supermicro's current CEO's brothers control Ablecom and Compuware. Both companies owe over 99% of their exports to Supermicro. The assumption is that this relational accounting risk is also transferred to the CEO's brother operating in Hong Kong and Taiwan as these entities resell Supermicro products. At the same time, investors should note there is not much controversy surrounding Nvidia (NASDAQ: NASDAQ:NVDA) and AMD (NASDAQ:AMD) CEOs, as first cousins once removed. Among other allegations, Hindenburg purports that Supermicro violated sanctions against Russia, allegedly having sold $46.3 million worth of high-grade IT solutions to Russia via Moscow-based Niagara Computers. Interestingly, the report admits that Niagara Computers is not on any OFAC sanction list. At the end of the line, it appears that the Hindenburg Report is rehashing settled issues, at least according to last Tuesday's note by JPMorgan (NYSE:JPM) analysts. "As we dig into the details of the report, we believe there to be limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC, and limited new information relative to the existing and already known business relationship with related companies owned by the siblings of the founder of SMCI," Furthermore, JPMorgan views the Hindenburg report as "largely void of details around alleged wrongdoings from the company." This aligns with Hindenburg's large focus on Russia sanctions but having represented little meat beyond listing numerous relationships prior to sanctions. This brings into focus Super Micro's bottom valuation line, how important is the company in the global data center/IT/AI business? Ironically, the Hindenburg Research report on Supermicro makes a strong case for the company's fundamentals, citing demand across China and Russia for high-grade server stacks, supercomputers, high-tech surveillance and generative AI infrastructure. But to countervail this, the report cites Nvidia's CEO Jensen Huang endorsement of Supermicro's competitor Dell Technologies (NYSE:DELL), stated in May 2024: "Nobody is better at building end-to-end systems of very large scale for the enterprise than Dell." As of Q1 2024, SMCI holds 5.86% market share against Dell's 51.40% in the computer hardware sector, which is one of the reasons why Dell is now deemed as under-the-radar AI powerhouse. With that said, Supermicro is unlikely to lose capital inflows amid continued IT upgrades of large enterprises. The very same month that the Nvidia CEO endorsed Dell, Supermicro received a massive order of upcoming Blackwell AI chips for the next-gen data centers. According to Taiwan Economic Daily, accounting for 10,000 GB200-based Blackwell servers, this would amount to 25% of total supply. Alongside SMCI's liquid cooling solutions necessary for HPC/AI workloads, Hindenburg report readily admits that the company could see further growth driven by AI demand. On the downside, the report cites decreasing Supermicro gross margins, going down from 17.1% in Q4 FY23 to 11.2% in Q4 FY24. However, this didn't stop SMCI's acquisition of more orders and expansion of supply chains during 2024, as it is widely understood that the sector is competitive. Case in point, Dell's CFO Yvonne McGill admitted in Q1 FY25 earnings call that AI optimized servers are "margin rate dilutive than margin dollar accretive." This is a way of saying that Dell's data center profitability (ISG division) is not up to par with its other divisions, but rather relies on "premium for the value that we've generated or accreted into our products". In contrast to Dell's OEM business model with value-added features, Supermicro focuses on more flexible and cost-effective customizable products and faster time-to-market response. For fiscal Q4 2024 earnings ending June 30th, Super Micro Computer reported $5.31 billion net sales compared to $2.18 billion in the year-ago quarter. Although the company's gross margin (non-GAAP) decreased from 17.1% to 11.2% in that period, net income increased from $193.5 million to $352.7 million. Just like Nvidia, Supermicro tracked triple-digit growth, having its revenue increased by 143% year-over-year. From an investor expectations standpoint, the company beat earnings per share estimates in Q4 '23 and Q1 '24 but failed to beat Q2 '24 EPS at 27% negative surprise, having reported $5.51 vs forecasted $7.56 EPS. SMCI's forward price-to-earnings ratio is 12.87 against the trailing P/E of 21.79, indicating that investors expect further Super Micro growth, which is backed by existing large orders for Blackwell-based servers. Even if there is more meat to the company's accounting allegations, which failed to impress JPMorgan analysts, Super Micro's potential fine is unlikely to upset its bottom line. Enterprises, big and small, will continue to spend on servers. Gartner's global forecast in July projects 25.3% growth in the data center sector, driven largely by solutions to optimize AI workloads. Given that this is Super Micro's focus, backed by established reputation and more orders, SMCI shareholders should see this reflected in the stock's future valuation. By Gartner's estimates, server spending should triple to $200 billion by 2028. In terms of SMCI's price forecasting, its average price target is now $674.67 per share. Against the current price of $451, this would constitute nearly 50% upside. Nasdaq's forecasting data further points to $1,300 SMCI price as the upper ceiling twelve months ahead, with $325 as the least optimistic forecast. *** Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Should Super Micro Computer's Response to Short-Selling Report Ease Investor Fears? | The Motley Fool

The stock has struggled following a weak earnings report and a short-selling report. Following the Labor Day holiday in the U.S., Super Micro Computer (SMCI -0.88%), or Supermicro as it is commonly called, responded to a recent short-selling report from Hindenburg Research. The company sent a letter to its customers and partners and put the letter in a filing with the SEC. The question is, should company's response ease investors' concerns? Last week, Hindenburg -- which has a short position in Supermicro and thus benefits when the stock drops -- raised several issues with how Supermicro does business. The allegations included evading sanctions and shipping banned components to Russia, management self-dealing, and accounting manipulation. The day after Hindenburg released its report, the company announced that it would delay filing its fiscal 2024 annual report with the Securities and Exchange Commission (SEC). Management said it required additional time to review the "design and operating effectiveness of its internal controls over financial reporting." Some investors have been particularly worried by these turns of events as the company was fined by the SEC in 2020 for recognizing revenue early and understating expenses. CEO Charles Liang was not charged with any wrongdoing but, according to the SEC, had to "reimburse the company $2.1 million in stock profits that he received while the accounting errors were occurring." Prior to that in 2018, the Nasdaq Composite suspended and then temporarily delisted the stock for not filing its financial statements on time. The release of Hindenburg's report and its latest filing delay hammered the stock. In Liang's letter Tuesday to its customers and partners, Supermicro said that neither the short report nor the filing delay will impact its products or services. It added that its liquid-cooled solutions continue to ramp up and that it remains well positioned. Meanwhile, it said it does not expect the delay to have any material impact on its fiscal Q4 or full-year results. It added that the short report contained "false or inaccurate statements" and misrepresented information that it had already shared publicly. Finally, the company said it would "address [Hindenburg's] statements in due course." The denial was pretty standard. Meanwhile, it wasn't great that the company's first action after the short report was to delay its 10-K filing, especially given its past history. While the short-seller's report and delayed filing have grabbed investors' attention, they are not the only issues that Supermicro has been dealing with lately. The company's stock sank 20% in early August following its fiscal Q4 results after it reported very disappointing gross margin. Gross margin, which greatly impacts profitability, came in at only 11.2% in fiscal Q4, down from 17% a year ago and 15.5% the previous quarter. Among the reasons for the decline, the company blamed reduced pricing in order to win new designs and the high costs to ramp up its direct liquid cooled (DLC) rack scale AI GPU clusters. It expects its gross margin to gradually improve throughout its new fiscal year and to return to the 14% to 17% range. Different industries have different margin profiles, but gross margin can tell a lot about a company and how valuable its offerings or services are. Semiconductor companies riding the artificial intelligence (AI) buildout have much higher gross margin. Nvidia had gross margin of 75.1% last quarter, while Broadcom's was 74.8% and Advanced Micro Devices' was at 49%. Even a foundry operator like Taiwan Semiconductor Manufacturing had gross margin of 53.2% last quarter. Supermicro has structurally low gross margin, well below other companies that are riding the AI infrastructure wave. And despite the company being in one of the best demand environments for AI infrastructure possible, its gross margins still worsened. That's concerning. However, this is a low-margin company with a history of accounting issues that just delayed filing its annual report. Yes, it's benefiting from the AI infrastructure buildout, but it's not a company with differentiated technology, like Nvidia, or one that has the scale and tech advantages, like TSMC. Dell and Hewlett Packard Enterprise, for example, are server companies that also offer direct liquid cooling. As such, I'd stay on the sidelines, as there are better ways to play AI infrastructure with companies that have higher margin and less controversy.

SMCI CEO Addresses Short Report, Delayed Filing In Letter To Customers And Partners - Super Micro Computer (NASDAQ:SMCI)

SMCI's stock price remains well-below its 50-day moving average of $707.78, according to data from Benzinga Pro. Super Micro Computer, Inc. SMCI shares are trading higher Tuesday after the company posted an update from its CEO regarding the company's delayed annual report and a recent short seller report. The Details: Super Micro CEO Charles Liang wrote a letter addressing the company's customers and partners stating the business remains unaffected by the accusations in the Hindenburg short report and the delayed filing of its annual report. "Neither of these events affects our products or our ability and capacity to deliver the innovative IT solutions that you rely on every day. Our production capabilities are unaffected and continue operating at pace to meet customer demand. Our world class engineering and support teams are also unaffected and continue to build and deploy large scale AI Total Solutions," wrote Liang. Read Next: What's Going On With Lululemon Stock After Earnings? The CEO reiterated previous statements that he has confidence in the finance and internal teams at Super Micro and does not anticipate any material changes to its financial reports resulting from the on-going audit. Liang also said the Hindenburg report contained "false or inaccurate statements" which will be addressed "in due course." SMCI shares are moving higher on above-average volume Tuesday as investors digest the CEO's statements. However, SMCI's stock price remains well-below its 50-day moving average of $707.78, according to data from Benzinga Pro. Will SMCI Stock Go Up? When trying to assess whether or not Super Micro Computer will trade higher from current levels, it's a good idea to take a look at analyst forecasts. Wall Street analysts have an average 12-month price target of $713.82 on Super Micro Computer. The Street high target is currently at $1300 and the Street low target is $325. Of all the analysts covering Super Micro Computer, 3 have positive ratings, 7 have neutral ratings and one has a negative rating. In the last month, 8 analysts have adjusted price targets. Here's a look at recent price target changes [Analyst Ratings]. Benzinga also tracks Wall Street's most accurate analysts. Check out how analysts covering Super Micro Computer have performed in recent history. Stocks don't move in a straight line. The average stock market return is approximately 10% per year. Super Micro Computer is 59.7% up year-to-date. The average analyst price target suggests the stock could have further upside ahead. For a broad overview of everything you need to know about Super Micro Computer, visit here. If you want to go above and beyond, there's no better tool to help you do just that than Benzinga Pro. Start your free trial today. SMCI Price Action: According to Benzinga Pro, Super Micro Computer shares are up 2.37% at $448.06 at the time of publication Tuesday. Read Also: Why Intuitive Machines Stock Is Soaring To The Moon Image: Shutterstock Market News and Data brought to you by Benzinga APIs