Super Micro Computer Stock Plunges Amid Short Seller Report and Market Concerns

Super Micro Computer: Why Buying It Now Could Be Risky (NASDAQ:SMCI)

High short interest in SMCI stock and its extremely cheap valuation could lead to a short squeeze if allegations prove unfounded, but it's prudent to avoid speculation for now. Last week, Super Micro Computer (NASDAQ:SMCI) experienced a nearly 30% selloff after delaying its annual report filing. Hindenburg Research released a report alleging accounting manipulations. This news triggered panic among investors. As an equity analyst with a background in accounting, I view this as a significant red flag. While some may argue that the company's fundamentals remain strong and that its valuation looks extremely cheap after the pullback, I believe buying the stock based on these factors is risky. If accounting manipulation is proven, it could indicate that the stock's valuation multiples are more expensive than they currently appear. A delay in filing financial reports is not a new issue for SMCI. Back in 2018, SMCI was delisted from Nasdaq for failing to file its financial report. The company was charged by SEC in 2020 for pushing employees to "maximize end of quarter revenue and minimize expenses in accordance with U.S. GAAP. SMCI settled the charges for $17.5 million. According to the Hindenburg Research, the company rehired all its top executives after they were fired three months ago. Therefore, we cannot entirely dismiss the company's accusations as unfounded. Investors should consider the possibility of potential accounting fraud and adjust their assessment of the company's fundamentals and valuation accordingly. There are two primary ways to gauge a company's financial health: historical trends and forward outlook. Let's start with SMCI's growth trajectory. In 4Q FY2024, the company beat revenue expectations but missed non-GAAP EPS estimates. I believe the miss was primarily due to a sharp decline in gross margin, which fell to 11.3% from 15.6% in the previous quarter. This decline put downward pressure on the operating margin and had a negative impact on the bottom line. The gross margin was significantly below the company's target range of 14% to 17%, which I see as a potential warning sign. Management attributed this drop to "customer and product mix and initial production costs on new DLC Technology." However, Hindenburg Research argued that SMCI is facing increasing cost competition from original design manufacturers (ODMs), which is impacting its gross margin. Now, let's take a look at the company's guidance. The company forecasts a revenue outlook that is significantly above the market consensus, implying nearly +200% YoY revenue growth in 1Q FY2025 and 90% YoY revenue growth in FY2025. Its midpoint of non-GAAP guidance also above the consensus. Therefore, despite a mixed 4Q FY2024 earnings result, the company is expected to perform strongly in the upcoming fiscal year. The management also signaled that its gross margin will gradually improve and reach its target range. Lastly, we observe that SMIC more than triple its capex in FY2024 to maintain its competitive stance amidst the current AI boom. Therefore, based on its forward outlook, it appears that the stock is undervalued given its cheap valuation. However, this relies on the assumption that SMCI's financials are reliable for investor analysis. According to Seeking Alpha, the street has been boosting the company's revenue and earnings consensus over the past six months. Yet, sell-side analysts often downplay the risk of potential accounting manipulation and may not fully consider such possibilities. Their estimates typically lag behind those of buy-side investors, as evidenced by the recent stock adjustment reflecting this 'tail risk.' Therefore, investors should be cautious, as relying solely on the company's current fundamentals might be misleading at this juncture. On August 27th, Hindenburg Research published a report accusing SMCI of multiple accounting irregularities, undisclosed related-party transactions, violations, and export control failures. After reviewing the report, I found it focused heavily on events from 2018 but lacked concrete evidence to substantiate claims that the company's recent triple-digit revenue growth was the result of "channel stuffing" or "improper revenue recognition". The report did not address SMCI's guidance of significant revenue growth acceleration, forecasting a roughly 208% YoY increase for 1Q FY2025, up from 143% YoY in 4Q FY2024. Additionally, the credibility of recent interviews with former employees remains unclear. The rehiring of former top executives does not necessarily imply that SMCI will repeat past behavior. The report also highlighted potential 'conflicts of interest' involving major suppliers Ablecom and Compuware, owned by CEO Charles Liang's siblings, with SMCI paying these firms $983.1 million. However, this is not new information. Lastly, while the U.S. has implemented strict export bans to Russia and China, the report suggests SMCI continues to ship products to Russia and has entered a joint venture with a Chinese state-controlled entity. Although this may raise regulatory concerns, it's unlikely to significantly impact SMCI's long-term growth outlook. According to Seeking Alpha, the stock currently has a high short interest of 9.23% following the recent short report. If the accusations in the report do not materialize, SMCI could experience significant upside potential due to a possible "short squeeze". Given its triple digit revenue growth momentum in recent quarters, the stock is currently trading at an attractive valuation of 13x non-GAAP P/E fwd and 0.95x EV/Sales fwd, both below its 5-year averages. This is in stark contrast to the lofty valuations seen in the broader market, where the S&P 500 is trading at 23x P/E fwd and the Nasdaq 100 at 29x. However, due to the delay in filing its FY2024 10-K annual report, it would be prudent for investors to avoid speculation and remain on the sidelines until we have more clarity in the coming months. The bottom line is that SMCI still faces significant uncertainty following its recent selloff, allegations of accounting manipulation, and other regulatory concerns. While the company's strong FY2025 guidance and attractive valuation might suggest a compelling buying opportunity, the potential for inflated earnings based on the historical context of past reporting issues presents a tail risk for investors who are considering speculation at this moment. The recent Hindenburg Research report raises concerns but fails to provide sufficient details to support its claims. Nevertheless, investors should remain cautious. As we await SMCI's FY2024 annual report, I remain neutral on the stock.

Super Micro Computer Plunges on Short-Seller Report. Can You Trust Hindenburg Research? | The Motley Fool

Shares of Super Micro Computer (SMCI -2.48%), a darling of the generative AI revolution, tumbled as much as 28% on Wednesday after the server maker suffered a brutal one-two punch. First, the company was the target of a short report from Hindenburg Research, which alleged a wide range of problems at the company, including undisclosed related-party transactions and accounting irregularities. Shortly after that report was released, Super Micro Computer announced it would not file its 10-K annual report on time. The company said it needed additional time to "complete its assessment of the design and operating effectiveness of internal controls over financial reporting." The short-seller report didn't appear to cause the late filing notice, but the two items combined certainly look like a red flag for Supermicro, as the server maker is also known. Of the two issues, Hindenburg's accusations seem like the more concerning problem at the moment since the late filing only matters if there are indeed accounting inconsistencies discovered. Hindenburg's findings, if true, could be damaging over the long term, especially as Supermicro was previously fined by the SEC in 2020 for $17.5 million for insufficient "internal accounting controls." A short report doesn't always mean what the market thinks it does. While stocks tend to fall in response to short-seller attacks, it's important for investors to understand the short-sellers releasing these reports want the stocks they target to fall so they can make money on their bets. Because of this financial incentive, short-sellers can exaggerate claims or allege problems without substantive evidence. Stocks generally fall in response to a short report, but they don't always stay down. One of the best ways to determine whether the Supermicro report will live up to scrutiny is to look at Hindenburg's track record. Hindenburg, founded by Nate Anderson, is one of the better-known activist short-sellers today. The company tends to focus on issues like accounting irregularities and undisclosed related-party transactions, and those are at the center of its attack on Supermicro. It was also twice named top short-seller by Activist Insight, in 2021 and 2022, showing it's respected within the industry. Hindenburg has had some wins in the past. The company may be best known for its attack on Nikola in 2020 and its CEO, Trevor Milton. Hindenburg called out what it deemed an 'ocean of lies' that Nikola had put forward ahead of its planned partnership with General Motors. Hindenburg accused the company of using a "pusher" -- a car that didn't work -- in a promotional video, which Nikola later admitted. The report led to Milton's resignation, and he was eventually indicted and sentenced to four years in prison. Hindenburg also called out trouble at Lordstown Motors in 2021, saying the company's pre-order book was "largely fictitious." Within a few years, the SEC charged Lordstown Motors with "misleading investors about the sales prospects of" its flagship vehicle. However, Hindenburg hasn't always been right. Last March, it attacked Block, the fintech company that owns Square and Cash App, causing the stock to plunge after it alleged fraud and a lack of regulatory compliance at the company. Block never faced any regulatory or legal consequences from the report, and the stock has been essentially flat since the report came out. The combination of the Hindenburg attack and the delay in its 10-K filing is certainly troubling for Super Micro Computer. Still, while it's a setback for the company, without evidence, it's not necessarily enough reason to sell the stock. Investors should expect a response from management countering Hindenburg's allegations, though that might come second to Supermicro's delayed filing. The good news for prospective investors is that Supermicro stock looks dirt cheap right now at a forward price-to-earnings ratio of 13, and it just posted another quarter of triple-digit revenue growth. The boom in the AI server market is very much real and has been confirmed by peers like Dell Technologies. However, given the uncertainty surrounding the company right now, shareholders should be prepared for heightened volatility going forward.

Super Micro Computer's Stock Sinks: Time to Buy or Sell? | The Motley Fool

Super Micro Computer (SMCI -2.48%), more commonly known as Supermicro, was one of the hottest artificial intelligence (AI) stocks this year. Its shares closed at a record high of $1,188.07 on March 13, representing a 2,760% gain over the previous two years, as its sales of dedicated AI servers skyrocketed. But as of this writing, Supermicro's stock trades at $424. Four issues caused that slide: concerns about its declining gross margins, troubling allegations from a prolific short-seller, a delayed filing of the company's annual report, and Nvidia's (NASDAQ: NVDA) decelerating sales growth. Let's see if investors should buy or avoid this fallen AI stock. Supermicro controls a smaller slice of the server market than Dell Technologies or Hewlett Packard Enterprise, but it carved out a niche with its high-performance liquid-cooled servers. That strategy made Supermicro an ideal partner for Nvidia, which provided the company with a steady supply of its high-end data center GPUs. As a result, Supermicro's sales of dedicated AI servers skyrocketed as the rapid expansion of the AI market drove many companies to upgrade their data centers. The company's revenue rose only 7% in fiscal 2021 (which ended in June 2021) but surged 46% in fiscal 2022, 37% in fiscal 2023, and 110% in fiscal 2024 as those AI tailwinds kicked in. Analysts expect its revenue to grow another 89% in fiscal 2025 and 12% in fiscal 2026. Bank of America estimates that Supermicro already controls 10% of the dedicated server market, and it expects it to grow its share to 17% within the next three years as the entire market expands 150%. The bulls believe that Supermicro's booming AI server business, which already accounts for over half of its revenue, will offset its slower sales of traditional servers. That's why its stock has rallied alongside Nvidia's over the past two years. Supermicro has grown like a weed over the past year, but a few cracks in the bull thesis appeared during its fourth-quarter earnings report on Aug. 6. Its 144% year-over-year revenue growth exceeded Wall Street's expectations, but its 78% adjusted earnings growth broadly missed the consensus forecast for 130% growth. Data source: Super Micro Computer. YOY = year over year. The main culprit was the gross margin, which fell both sequentially and year over year as the company sold a less lucrative mix of mostly lower-margin products and ramped up spending on its newest direct liquid cooling (DLC) solutions. That contraction is troubling because it indicates Supermicro is selling its AI servers at considerably lower margins than its traditional servers. That loss of pricing power was already weighing down Supermicro's stock when Hindenburg Research released a short-seller report on Aug. 27. Short-sellers make money when a stock on which they are "short" falls. The firm alleges Supermicro "faces significant accounting, governance and compliance issues and offers an inferior product and service being eroded away by more credible competition." It points out that Supermicro's cloud deal with Amazon Web Services (AWS) ultimately failed and that its "exclusive" deal with Tesla actually ended when the EV maker struck a similar deal with Dell this May. Hindenburg leveled other allegations and the following day Supermicro postponed its 10-K filing, saying it needed "additional time" to assess its "internal controls over financial reporting." Its stock plummeted after that startling announcement, and it continued dropping after Nvidia posted its latest earnings report -- which featured strong but slowing sales of its data center chips. Supermicro's stock trades at just 13 times forward earnings after its near-40% decline over the past month. That's a low valuation, but its shrinking gross margins, the troubling short-seller accusations, and its delayed 10-K filing raise some bright red flags. Its insiders also didn't buy a single share of the stock as it collapsed over the past three months. I thought Supermicro was an undervalued growth play after its postearnings plunge, but until Supermicro clears up the cloud around it with a clear 10-K filing, it's smarter to avoid or sell its stock and stick with more promising AI plays instead.

Should Investors Worry About Super Micro Computer's Short Attack? Or Should They Buy the Dip?

A delayed 10-K filing adds to the drama surrounding this tech stock. Super Micro Computer (SMCI -2.48%) stock came under attack from short-sellers this week, with the computer server specialist being accused of several financial improprieties. The question for investors is: Should they be worried about the allegations and sell the stock, or is any dip in the share price a buying opportunity? The short report Short-selling is the process of an investor borrowing a stock from a current shareholder and then immediately selling it with the intention of buying it back later at a lower price. Short investors often pay a borrowing cost, which is interest a broker collects to lend out the stock. The more heavily a stock is shorted, the higher the borrowing rate tends to be. In fact, sometimes borrow rates can get quite high. Earlier this year, borrowing costs to short Trump Media & Technology Group got as high as a 900% annual rate. Now, while shorting often gets a bad rap because investors often feel that short-sellers are betting against their investments, short-sellers do play an important role in the market, as they can expose overlooked risks regarding a company and/or its stock. In some cases, short-sellers can call out fraud and even criminal activity. This was the case with Insys Therapeutics, which played a large role in the fentanyl epidemic that hit the country. Sometimes short-sellers will make their short theses public in order to try to drive down a stock's price, which would help them make a profit. These reports can be a mixed bag. They can be pretty accurate, but they can also appear to be exaggerated or even misleading. Super Micro Computer, or Supermicro as it is also known, is one of the highfliers of the artificial intelligence (AI) infrastructure build-out. This month it became the latest subject of a short report from Hindenburg Research. In its report, Hindenburg accuses the company of accounting manipulation, evading sanctions, and related-party self-dealings by management. Should investors worry about the Hindenburg report? The purpose of a short report like the one on Supermicro is to bring attention to what could be serious issues and ultimately send the stock lower. Shorting stocks is inherently more difficult than being long on stocks, for a few reasons. One is that the risk is technically unlimited. When you buy a stock, you can only lose the amount of your investment, if a stock goes to zero. But with shorting, stocks can continue to go up, and you can lose more than your initial investment. At the same time, when longs go down, they become a smaller part of your portfolio, but when shorts go up, they become bigger. Finally, short investors have to deal with borrowing costs that can eat into their returns as well. Given these dynamics, it is often best for short-sellers if their theories on a stock are proven true sooner rather than later. And that is why you will often get these public reports, which tend not to be subtle in their intent. But just like with long investments, sometimes short theses play out, and sometimes they don't. Regarding Supermicro, it is worth noting that the company does have a history of accounting manipulation. The SEC fined the company in 2020 after finding that its former CFO had prematurely recognized revenue and understated expenses over a three-year period. The SEC said that the company pushed employees to maximize quarter-end revenue and would recognize revenue for products shipped to warehouses, not customers. CEO Charles Liang was fined $2.1 million. Meanwhile, the stock had to be temporarily delisted from the Nasdaq Composite in 2018 for not filing financial statements on time. Time to buy the dip or stay away? Not helping matters for Supermicro, the day after the short report, the company announced that it would delay the filing of its 10-K report for fiscal 2024 with the SEC, saying management needed more time to assess the design and effectiveness of its internal controls over financial reporting. At the very least, that's not great timing. In addition to these potential accounting issues, the company is also currently dealing with gross margin issues as well. Last quarter, it saw its already thin gross margin fall from 17% a year ago to 11.3%. It's been seeing strong revenue growth from the AI infrastructure build-out, but its thin margins indicate that it sells pretty commoditized products. Given the questions raised by the short-seller's report, the ill-timed filing delay, and weak gross margins, I'd stay on the sidelines with Supermicro stock.

Why Super Micro Computer Stock Crashed 28.6% This Week | The Motley Fool

The AI stock suffered a brutal week of trading, and investors have some big questions about the business. Super Micro Computer (SMCI -2.48%) stock got hit hard over the last week of trading. The company's share price ended the period down 28.6% from last Friday's market close, according to data from S&P Global Market Intelligence. On Tuesday, Hindenburg Research published bearish coverage and alleged that Supermicro was a serial offender when it came to bad accounting practices. The short-seller also raised other concerns about the strength of the business. Just one day later, the server specialist announced that it was delaying the filing of its annual 10-K report with the Securities and Exchange Commission (SEC). With its short note, Hindenburg stated that it had found evidence of new accounting manipulations by Supermicro. The report highlighted $983.1 million in payments made over the last three years to private companies owned by brothers of Supermicro CEO Charles Liang as being suspicious. The company previously had significant accounting scandals in 2018 and 2020. Hindenburg also said that it believed the server specialist was guilty of evading sanctions imposed by the U.S. government. Supermicro's high-performance rack servers use advanced processors from Nvidia that are prohibited from being exported to China, and reports have suggested that the server company has continued to sell these technologies to Chinese customers. Just one day after Hindenburg's report was published, Supermicro said it was delaying its 10-K filing to complete an assessment of the design and operating effectiveness of its internal controls over financial reporting. The company did not provide a timing window as to when the 10-K filing might be submitted. In a note published Wednesday, Wells Fargo maintained an equal-weight rating on Supermicro but lowered its price target on the stock from $650 per share to $375 per share. The firm's analysts cited uncertainty about the company's revenue picture and previous history with accounting problems as reasons for the target cut. The next day, Bank of America (BofA) lifted its rating on Supermicro and shifted its status on the stock to under review. Citing the review of the company's financials and internal oversight processes, BofA's analysts said that they were unable to get a read on Supermicro's fundamentals.

Not every analyst is bearish on Super Micro Computer stock

The maker of liquid-cooled artificial intelligence servers was one of the stock market's brightest bulbs earlier this year. But Super Micro shares have been clobbered since they peaked in March, and they got absolutely battered last week when short-seller Hindenburg Research took aim at it. It didn't help matters that Super Micro's CEO, Charles Liang, announced a delay in filing quarterly results with the Securities and Exchange Commission, either. Related: Apple stock forecasted as top AI pick before crucial rollout What happens to Super Micro's stock next is anyone's guess, but the shellacking hasn't gone unnoticed. Many of the analysts who have weighed in so far are bearish. Wells Fargo, for example, cut its Super Micro stock price target by over 40%. However, not everyone is convinced that the short report represents 'new' news or that SMCI share price deserves to have fallen so much this week. JP Morgan: different view of Hindenburg SMCI report Analysts at JP Morgan have a different view of the Hindenburg report. The investment firm, which has an overweight rating on Super Micro Computer (SMCI) , said it saw limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC. Related: Major analyst delivers crushing blow after Super Micro stock price crashes It also saw limited new information relative to the "existing and already known" business relationship with related companies owned by Liang's siblings. "The allegations relative to sanction evasion are tough to verify," JP Morgan analysts said, "but it is still worth highlighting that the magnitude of revenues referenced in the report does not change the medium-term revenue opportunity for the company in relation to the addressable $275 billion artificial intelligence server [total addressable market] in 2026 and 2027." Super Micro's challenges from 2018-2020 are known to investors, JP Morgan said. The report "relies in revisiting history to make the suggestion of similar practices at this time and quotes 'Our investigation found major corporate governance red flags and evidence of continued improper revenue recognition...' without any details." The report also highlights several rehires as evidence of repetition of prior practices, JPM said, although with limited details around the correlation between the two. More AI Stocks: "Interestingly, evidence about recent culture and practices are based on interviews with former employees in all instances cited in the report," JPMorgan said. The firm said that it saw the report "as largely void of details around alleged wrongdoings from the company that change the medium-term outlook, and largely revisiting the already known areas for improvement in relation to corporate governance and transparency." "It is not surprising that the company has areas for improvement to further refine governance, transparency, and communication with investors, which would be more appropriate for a company of its size following its recent spurt of growth in conjunction with AI server demand," JP Morgan said. "However, the lack thereof does not immediately suggest wrongdoing by the company, in our view," the firm added. Evercore analysts shift focus to Dell, others Nevertheless, there are other investment options in the AI server space, and given the adage, "where there's smoke, there's fire," some analysts are pivoting. Related: Analysts revise Dell stock price target ahead of earnings Analysts at Evercore ISI said that given some recent negative concerns around Super Micro, "it's critical to think through the competitive landscape when it comes to AI servers." The firm said Dell (DELL) was poised to gain share and "remains a logical partner for customers who look for better/different supply chain diversity, and crucially, a strong services offering through the deployment life cycle." Evercore ISI said that its view remains that key customers like CoreWeave and the "Musk companies" of EV producer Tesla, social-media platform X, and supercomputer developer xAI are "largely dual sourcing production" across both Dell and Super Micro. The firm said that HP Enterprise can "potentially scale into some of these ramps as well." Evercore ISI, which maintained an outperform rating and $140 price target on Dell shares, estimated that Dell's AI server revenue is on track to exceed $8 billion this year and likely to exceed $10 billion next year. Related: Veteran fund manager sees world of pain coming for stocks