SMCI Under Fire: The AI Giant's Battle with Short Sellers - A Misjudgment?

Super Micro Computer has been having a tough time recently, with its stock price dropping by 10% before the market opened. This decline follows a report by the well-known short-seller Hindenburg Research.

You might not be familiar with the name Hindenburg Research, but you've likely heard of their work, such as exposing financial fraud at electric truck company Nikola, which led to a 40% drop in its share price and the arrest of its founder, and accusations against India's Adani Group for decades of accounting manipulation, causing a stir in the Indian Parliament and a $150 billion loss in market value.

This time, Hindenburg Research targeted Super Micro Computer. After a three-month investigation that included conversations with former executives and a review of past records, they concluded that Super Micro Computer is facing significant issues including accounting irregularities, undisclosed related-party transactions, evasion of sanctions and export controls, and customer-related problems.

Super Micro Computer has had accounting issues for some time. In 2018, it was delisted from NASDAQ for failing to file financial statements on time. In 2020, the SEC accused the company of accounting violations involving $200 million in false revenue and underestimated costs. The company settled with the SEC and paid a $17.5 million fine. However, less than three months later, the involved executives returned to the company.

In April this year, new allegations emerged stating that Super Micro Computer resumed improper revenue recognition and bypassed internal accounting controls shortly after settling with the SEC. Former employees and customers reported that sales personnel, under pressure, would push dealers to take on inventory or force problematic products onto clients at quarter-end.

Super Micro Computer's related-party transactions are also questionable. The report indicates that the company engaged in suspicious transactions with both disclosed and undisclosed related parties. For example, suppliers Ablecom and Compuware, controlled by brothers of CEO Charles Liang, received $983 million in revenue from Super Micro Computer over the past three years. These transactions involve a peculiar pattern where Super Micro Computer provides components to these companies, which then assemble them and sell them back to Super Micro Computer, almost exclusively. Additionally, two Taiwanese companies controlled by the CEO's youngest brother were not publicly disclosed as related parties in these transactions.

Regarding export controls, Hindenburg Research analyzed 45,000 import-export records and found that Super Micro Computer's exports of high-tech products to Russia tripled after the start of the Russia-Ukraine war, and at least 46 of the handling companies were on the U.S. sanctions list. This contradicts Super Micro Computer's claim that it had ceased all sales to Russia.

In summary, Hindenburg Research's report highlights numerous issues at Super Micro Computer, from accounting irregularities and related-party transactions to export control violations, each potentially a serious concern.

As an investor holding Super Micro Computer shares, it's crucial to carefully consider the short-seller report. Institutions often have access to resources and individuals that retail investors do not, making it difficult to verify claims. Instead, one should assess the angles of attack, the completeness and strength of the evidence, and how these relate to one’s investment thesis, to reassess the risk of the position.