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SMCI sell-off continues amid disappointing guidance. Are you bullish or bearish?
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JGPM joined discussion · Oct 31 15:04

Why SMCI's situation is a massive threat to Nvidia

$Super Micro Computer (SMCI.US)$ has faced allegations of accounting manipulation, which have escalated this morning when it was revealed that their auditor, Ernst & Young, resigned. The true extent of the situation is not yet known to the public
SMCI is one of Nvidia's largest customers, accounting for 9% of their sales. If they go under, $NVIDIA (NVDA.US)$ will take a massive hit to their future earnings.
Some may argue that it does not matter, because since Nvidia's production is sold out, any gap in orders would be filled by other customers. There are 2 problems with this assumption:
1. This ignores the impact of a hypothetical liquidation of SMCI. If SMCI was faking orders, this would mean that they likely have a growing inventory of AI chips. These would then be auctioned off, creating a surge in supply, competing with new orders.
2. The duration of Nvidia's lead times can impact their margins and pricing power. If you have a 12 month lead time due to immense demand, you can hike prices. If that lead time shrinks to 1 month due to losing a significant customer, you have less margin to raise prices without impacting sales.
This scandal could also draw attention to other "round tripping" arrangements in the tech industry, in which circular transactions are set up in order to fake revenue growth. This could very much be the start of the unraveling of a bubble.
This isn't going to bankrupt Nvidia, they still have incredibly successful products and other customers, but it could definitely lead to a case where earnings growth stagnates, or is not sufficient enough to justify their current share price.
Despite this tremendous threat, Nvidia is down just 1% today, which is well within its normal volatility. The market is not responding to this new information appropriately.
Good luck to anyone who got burnt by SMCI...🙏🙏🙏
Why SMCI's situation is a massive threat to Nvidia
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JGPM
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