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Dark Week for Once High-Flying AI Darling. Super Micro Is Now Oversold
$Super Micro Computer (SMCI.US)$ stock fell over 27% this week after Hindenburg Research announced a short position in the maker of server equipment. The company had become a tech market favorite as a key beneficiary of the AI boom. After the brief report, the server-hardware company delayed submitting its annual financial report for fiscal year 2024.
After an investigation from Hindenburg, the report pointed out "glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues" in Super Micro Computer.
Rosenblat analysts said that while the 10-K delay "is not a good look," today's plunge in SMCI stock "seems over the top when considering the Hindenburg dynamic as old news or inaccurate." However, others believe the delay adds uncertainty, especially since major companies like Nvidia and Tesla are reducing their reliance on Super Micro, which could benefit competitors like $Dell Technologies (DELL.US)$.
On the report day, the stock plunged more than 19%, with implied volatility increasing nearly 25%, trading at $93. Options trading volume surged to twice the previous day's level, with a slight edge in put options. The most active option is the $400 put expiring on Friday, with 37,700 contracts traded and 1,874 open interest. This put option saw its premium rise almost 70-fold during intraday trading yesterday, and several other put options gained more than 20 times their value -- sending the stock to now around oversold.
Previous Market View
Super Micro's bull market was driven by strong demand for AI chips.
According to Super Micro's 2023 10-K report, their server business grew due to rising demand for GPUs, high-performance computing, and rack-level solutions, particularly for data centers and AI applications.
Over the past three years, the company's revenue increased 110% year over year and experienced a 61% compound annual growth rate.
However, the main challenge is that Super Micro faces tough competition from big tech companies like Dell and $Helmerich & Payne (HP.US)$ in the AI server market. CNBC reports that analysts are worried Dell is selling its AI servers at very low prices, close to zero profit, to remain competitive.
Historically, Super Micro had much higher profit margins than its competitors. But now, its margins are falling, going from over 15% between 2020 and 2023 to 11.2% in the fourth quarter of 2024 (March to June).
Accounting Violations, Transactions With Related Party Entities Controlled, Undisclosed Related Party Transactions and Key Customers To Leave Super Micro
1. Hinderbutg found major corporate governance red flags and evidence of continued improper revenue recognition, following similar charges against the company that resulted in its delisting in 2018 and an SEC charge in 2020.
Almost two years later, in early 2020, the company regained Nasdaq compliance but was charged by the SEC later that year for "widespread accounting violations," primarily involving over $200 million in improperly recognized revenue.
2. Super Micro shows signs of questionable revenue recognition and has serious governance issues.
These mainly involve deals with supplier companies run by the CEO's younger brothers. Such relationships can be used to manipulate financial numbers like profit margins:
a. If the related company charges Super Micro less, the public company's profits look better, but the difference is hidden in the related company's finances.
b. If they charge more, it can reduce the public company's profits, allowing insiders to benefit at the company's expense.
These concerns are even more troubling considering Super Micro's past issues with the SEC, where they were caught understating expenses to make their profits seem higher.
3. Records show that Super Micro's CEO's youngest brother, James Liang, owns two Taiwanese companies ("Aeon Lighting" and "Aeon Biotech") that make server components and operate out of the Super Micro Science and Technology Park, yet Super Micro has never disclosed any related party transactions with these entities.
However, Super Micro has not disclosed any related party transactions with any Aeon entities, the products received, or the costs of those products in its public filings.
4. Like almost all major tech companies, recommendations or endorsements from customers and partners are crucial for driving revenue.
In Super Micro's core markets, the U.S. and Europe (which make up 71% of its total revenue), Hinderbutg found that many dissatisfied customers have taken their business elsewhere.
As a result, Super Micro needs more control over pricing. In the fourth quarter of 2024, even though their revenue went up by 38%, their sales costs rose by 45%. This shows that despite higher demand, Super Micro wouldn't be able to charge customers enough to cover these increasing costs.
Woo Jin Ho, an analyst at Bloomberg Intelligence, wrote that Hindenburg's report "could raise greater scrutiny on the server-equipment maker's accounting practices and customer transactions," and that while Hindenburg's concerns aren't new, they "might intensify the spotlight on client relationships, especially given heightened US scrutiny of AI-systems sales to sanctioned companies and countries."
Source: Hindenburg Research, Bloomberg
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Master Corgi : Nonsense. Buying and holding
Laine Ford : no comment
bojie619 : Institutions want to control the market at a low stock price, and they can always come up with various reasons to confuse people. If there is no panic selling, where would cheap chips come from? How to maximize profits? Even high-quality stocks like Nvidia can find flaws. Even if all your indicators exceed expectations, I can find uncertainties in elections to collaborate and suppress stock prices for various personal interests! How can we make profits without snatching chips from retail investors and small institutions? Various dark bearish institutions have contributed to the current downward trend... Fortunately, we are not leveraged traders, if it continues to drop, we will buy the dip!
Cypher : Last sentence of the first paragraph, what fiscal year? Certainly not 202.