Nvidia's main sales partner Super Micro faces the risk of delisting! What is the impact on the AI industry of the "unexpected three stocks" selected?

ビットバレー投資家 wrote a column · Nov 14, 2024 16:27

Nvidia's major sales channels are $Super Micro Computer (SMCI.US)$ ToEmergence of delisting risksIs

AI server giant Super Micro, after being pointed out with "accounting red flags" by short sellers in August, saw its auditor resign at the end of October, with suspicions of irregularities spreading. The company stated during the earnings call on November 5 that no evidence of fraud was found. However, concerning the missing annual report (Form 10-K), they explained that they could not predict when it could be submitted. Unable to dispel the suspicions of irregularities, there is now a risk of delisting if the Form 10-K is not submitted by the deadline.

Super MicroIsSelling servers equipped with NVIDIA AI semiconductorsAnd holds an important position in the AI supply chain. How will Super Micro's predicament affect NVIDIA and the AI supply chain?Super Micro's latest interim financial statementsAndSupply chain surrounding NvidiaandConfirming Super Micro's competitors.and exploring its impact. From there emerged the 'three potential stocks' that should also be checked.Make sure to check the 'three potential stocks' that surfaced from the investigation alongside.Said.

Super Micro's interim financial results and earnings call.
● Interim revenue and outlook lower than expected
Super Micro announced on November 5th,Unaudited financial datawere disclosed, and an earnings call was held.
◇July-September interim revenue: lower than expected
The provisional revenue for the July-September quarter is between $5.9 billion and $6 billion, which was revised downward from the guidance of $6 billion to $7 billion. It fell below the market forecast of $6.47 billion.
(Market forecast based on Bloomberg aggregation, same as below)
◇Guidance for the October-December quarter: Expected to fall short of estimates.
The company has provided a revenue outlook for the October-December quarter of $5.5 billion to $6.1 billion, falling below the market forecast of $6.79 billion.

● Earnings call (partial)
◇Regarding the downward revision of revenue
Charles Ryan, CEO, explained that one of the main reasons is that there are customers waiting for (NVIDIA's) Blackwell products. He mentioned that it is a good thing that the previously delayed Blackwell is gradually becoming available, and he expects sales to increase in the January-March 2025 quarter.

◇Regarding the delay in submitting Form 10-K
The CEO acknowledged about the delay in submitting Form 10-K, stating, 'We are not sure to what extent it may have an impact, but there might be some.' At the same time, he commented, 'Personally, I am still very optimistic about our future growth.'

◇Relationship with NVIDIA
The CEO mentioned having a relationship with NVIDIA spanning decades and expects further strengthening of the cooperation between the two companies. He stated that he does not anticipate any negative impact from NVIDIA.

◇About competition.
The CEO acknowledged that there is certainly some pressure from competition, but personally expressed that the latest technology, Blackwell, is seen as a growth opportunity for Sabre and feels very optimistic.

◇About the deadline of November 16th.
In response to analysts' question about the deadline on the 16th ('*'), the management team is making every effort to change the auditing firm as soon as possible, and plans to submit an extension plan to Nasdaq.

Following the delay in submitting the Form 10-K by Sabre, Nasdaq sent a notification to the company on September 17. According to company documents, 'Under Nasdaq rules, the company must submit the Form 10-K within 60 days of the notification date or submit a plan to Nasdaq to regain compliance with Nasdaq listing rules. If the plan is submitted and accepted, the company may be given a compliance recovery period of up to 180 days from the Form 10-K submission deadline. If Nasdaq does not accept the company's plan, the company will have the opportunity to appeal the decision to Nasdaq's Hearings Panel. The company intends to take all necessary actions as expeditiously as possible to comply with Nasdaq's continued listing requirements.' As the notification date was September 17, the deadline within 60 days falls on November 16.

(Note: Some of this information is translated automatically. For details and the latest information, please refer to the company's disclosure materials.)

Additionally, Sabre declared on November 13 that 'additional time is needed' and submitted to the Securities and Exchange Commission that the Form 10-Q (quarterly report) could not be submitted by the deadline. Following this announcement, the stock price plummeted further on the 13th.

●Analysts' Reactions (from Bloomberg)
After Super Micro's interim financial results announcement and earnings call, analysts have been lowering their investment decisions and target stock prices. Multiple securities firms have temporarily suspended evaluations.

Nvidia's main sales partner Super Micro faces the risk of delisting! What is the impact on the AI industry of the "unexpected three stocks" selected?

The main reasons cited include the following:
◇Despite demand significantly surpassing supply in the AI server market, Super Micro revised downwards its quarterly revenue forecast.
◇Confusion due to the delayed submission of Form 10-K and the resignation of the auditing firm has increased the risks associated with future forecasts.
◇In order to address the uncertainties related to investors' concerns and the timing of the appointment of a new auditor, the management made limited commitments regarding changes (some suggest that changing the management is highly likely to be a prerequisite for finding a new auditing firm).
◇The increasing risk of not meeting the listing requirements of Nasdaq is expected to create pressure on the stock price due to the associated uncertainties.

Supply chain around Nvidia
Super Micro $NVIDIA (NVDA.US)$ As a leading seller of servers with AI semiconductors, Supermicro holds a relatively important position in the AI supply chain.

According to the Bloomberg Supply Chain feature, Super Micro accounts for approximately 8% of NVIDIA's revenue. This level is $Microsoft (MSFT.US)$ much lower than (19%) and $Meta Platforms (META.US)$ higher than (10%), but $Alphabet-A (GOOGL.US)$ (6%) and $Amazon (AMZN.US)$ (5%).

(※Based on Bloomberg's supply chain data. The reference dates do not necessarily match, and some of Bloomberg's forecasts are included, so these are simply reference values.)

Super Micro's customers include hyperscalers as well as Tier 2 cloud providers. Typically, due to the complex design and long lifespan of servers, changing orders is considered relatively difficult. Therefore, the impact on existing contracts that Super Micro has already acquired may not be significant at the moment (*). On the other hand, considering the ongoing uncertainties due to factors such as the resignation of auditors and delays in submitting Form 10-K, there might be a potential impact on acquiring new orders.

It has been reported that NVIDIA's leadership in AI server products has led to similar designs being realized between manufacturers, minimizing differences in structural components and modules, making it easier for clients to switch providers. (DigiTimes Asia)

In this earnings reporting season, demand for AI semiconductors (especially NVIDIA's Blackwell) and servers continues to be strong. It is expected that the growth cycle of Blackwell will truly begin in the coming year. The business environment and outlook surrounding the AI supply chain seem to remain unchanged.

According to DigiTimes Asia, "Nvidia is intervening to mitigate the impact of Super Micro's challenges on the entire industry and aiming to stabilize the supply chain." Customers also have a strong intention to introduce Blackwell as quickly as possible to win the AI race. Due to the uncertainties surrounding Super Micro, customers may shift orders or choose companies other than Super Micro for new orders.Competitors of Super Microfor them,There is a high potential to become a "windfall gain"Is expected.

Impact on Nvidia and AI supply chain
Based on the above, the following three points seem to be valid.
1）While the turmoil at Super Micro may to some extent impact NVIDIA, the effects are expected to be limited.
2）There is a possibility of prompting the reorganization of the AI supply chain, but Super Micro's competitors may become beneficiaries.
3）In terms of timing, Super Micro's competitors are likely to benefit from the start of Blackwell's growth cycle next year.

Competitors of Super Micro
When examining Nvidia's customers (as shown in the pie chart below), aside from hyper scalers (such as Microsoft, Meta Platforms, Alphabet, Amazon.com, Oracle) who directly purchase AI semiconductors from Nvidia, Supermicro's competitors are also included. $Tesla (TSLA.US)$ Other than that, Super Micro's competitors are also included. For example, $Dell Technologies (DELL.US)$ Such as Lenovo, Foxconn, $Cisco (CSCO.US)$ 、 $Hewlett Packard Enterprise (HPE.US)$ etc.

(Based on Bloomberg's supply chain data. Not necessarily matching the reference date, and some are Bloomberg's forecasts, purely for reference purposes.)

In addition, companies with kanji company names are mainly Taiwanese companies listed as non-US ADRs. DigiTimes Asia reported on November 12 that YTC Group in Malaysia changed the order of AI servers from NVIDIA from Super Micro to Wiwynn in Taiwan. Although Taiwanese companies are relatively small in scale, they are likely to benefit from the shift in orders from Super Micro, especially in regions other than the US.

From the above competitor of Super Micro,Picks 3 Stocks" (US stocks). Specifically,Nvidia's revenue ratio is relatively high.Dell Technologies、Hewlett-Packard、Cisco SystemsIt is expected that the shift in orders anticipated following the series of Super Micro's confusion may not happen "immediately", and it is expected to lead to more medium to long-term benefits rather than boosting the short-term performance of related companies.

"Three Chosen Stocks"
● $Dell Technologies (DELL.US)$
Super Micro's strongest competitor, NVIDIA, also has a good relationship.
◇In the AI server field, NVIDIA has become Super Micro's most powerful rival. As seen from NVIDIA's sales distribution (pie chart), among the major server players, Dell has a high revenue composition ratio with NVIDIA following Super Micro.

◇Before Super Micro's series of issues were revealed, Dell had already established a good partnership with NVIDIA. This point is also believed to work in Dell's favor.

◇Dell is strong in the enterprise sector. It is expected that in the coming years, benefits from AI adoption in the enterprise sector other than hyperscalers can also be expected.

◇An earnings call for the 8-10 month period is scheduled for November 26th (tentative).

Dell and Nvidia strengthened their partnership in May this year and announced the expansion of 'Dell AI Factory with NVIDIA'. In the announcement material, Nvidia's CEO Jensen Huang stated: 'To create AI, a new type of computing infrastructure, namely an AI factory that generates intelligence, is needed. Together with Dell Technologies, we are delivering a full stack of products including computing, networking, and software to a wide range of industries worldwide, thereby driving Copilot, coding assistants, virtual customer service agents, and promoting the industrial digital twin of the digital enterprise.'

● $Hewlett Packard Enterprise (HPE.US)$
◇Provides IT solutions such as servers, storage, and cloud to businesses and government agencies. Competing with Super Micro in the AI server field. Partnered with Nvidia and announced the co-developed 'NVIDIA AI Computing by HPE' in June this year. The first product, 'HPE Private Cloud AI' (AI product for enterprises), began offering in early September.

◇The earnings reports for the 5-7 month period announced in September showed an increase in the sales composition ratio of the AI server business. However, the overall gross profit margin decreased to 31.8%, falling below market expectations. The management mentioned that the backlog of AI systems has increased, and they continue to secure contracts from both model builders and sovereigns. They expressed their commitment to gradually increase the sales of high-margin products and services alongside AI servers. The 8-10 month period earnings reports are scheduled to be released on November 29th (tentative).

● $Cisco (CSCO.US)$
◇As the world's largest networking equipment company, nvidia competes with Super Micro in the networking equipment sector. They also provide AI servers.

◇They announced earnings on November 13. Based on that, the revenue for the 8-10 month period was $13.84 billion, a 6% decrease from the same period last year, but exceeded market expectations of $13.77 billion. Product orders for the network portfolio saw double-digit growth. Data center switching maintained double-digit order growth for the third consecutive quarter.

◇The revenue guidance for the November-January period is $13.75 billion to $13.95 billion, surpassing the market expectation of $13.74 billion at the median. The full-year revenue guidance has been slightly revised upwards from $55 billion to $56.3 billion, albeit modestly from the previous range of $55 billion to $56.2 billion. However, it fell short of the market's $55.9 billion expectation at the median.

◇Nvidia-based new AI server shipments are scheduled to begin next month. Management explained at the earnings call that the increase in AI-related expenses is a tailwind for the company. At the same time, they stated, 'The AI pipeline continues to perform well.' The company announced layoffs to strengthen investments in growth areas such as AI, cloud, and Sabre security. While this may lead to short-term increases in restructuring expenses, the reinforcement in growth areas is expected to lead to performance expansion in the medium to long term.