Super Micro’s aspirations for growth and financial hurdles
If there’s one thing to say about Charles Liang, it’s that he’s all about reaching for the stars.
The CEO and co-founder of Super Micro Computer (SMCI) is confident that his company, which focuses on premium servers, is “positioned exceptionally well to emerge as the largest IT infrastructure provider.”
“For 30 years, we’ve been fortifying our company’s strengths and foundations digitally,” Liang shared with analysts during the fourth-quarter earnings call on August 8.
“As the sole US-based large-scale AI platform designer and manufacturer, we’ve been delivering outstanding products in substantial quantities to our partners for over 25 years,” he noted.
Despite announcing a 10-for-1 stock split, the firm did not meet Wall Street’s expectations for earnings. Though revenue surged to $1.31 billion, the company’s profit margins decreased due to rising costs.
Regardless, Liang wrapped up his remarks by asserting, “Super Micro is ideally positioned to sustain our growth trajectory with our top-tier AI offerings, preparedness for infrastructure, and our efficiency in product delivery.”
The stock for the company, which joined the S&P 500 in March and Nasdaq in July, plummeted after the earnings report.
Numerous analysts revised their price targets and ratings for Super Micro Computer, with Bank of America Securities’ Ruplu Bhattacharya downgrading the stock from buy to neutral and cutting his price target down to $70 from $190.
It seems they’re not alone in their disappointment.
Allegations from Hindenburg Research and their effect on the market
Super Micro’s stock dropped on August 27 following a critical report released by short-seller Hindenburg Research concerning the San Jose, CA-based firm.
After a three-month investigation, Hindenburg stated that it “uncovered significant accounting red flags, evidence of undisclosed related party transactions, sanctions, and export control violations, along with customer difficulties.”
“In summary, we view Super Micro as a repeated offender,” the firm declared in its report. “It thrived as an early leader but continues to grapple with substantial issues in accounting, governance, and compliance and currently provides an inferior product and service, now facing more credible competition.”
The report pointed out that it included interviews with former senior employees and industry experts, along with a thorough review of litigation, international corporate, and customs records, highlighting “accounting manipulation, sibling self-dealing, and evasion of sanctions.”
Hindenburg recalled that in 2018, SuperMicro faced a temporary delisting from Nasdaq due to failed financial statement submissions.
By August 2020, the Securities and Exchange Commission charged the company with “extensive accounting violations,” primarily concerning more than $100 million in improperly recognized revenue and understated expenses, which led to inflated sales, earnings, and profit margins.
“Less than three months post a $20.5 million SEC settlement, Super Micro began rehiring top executives involved in the accounting scandal, based on litigation records and interviews with former staff,” the report noted.
A former salesperson relayed to Hindenburg that “nearly all of them are back. Almost all the individuals who were let go due to this wrongdoing.”
In another instance, a former salesperson recounted pushing products to distributors based on fabricated demand forecasts, completing a partial shipment, and later concocting an excuse for the incomplete delivery.
The report indicated that both disclosed and undisclosed related parties introduce accounting risks concerning revenue recognition and declared margins.
A former executive conveyed to Hindenburg that “essentially, it’s an issue of governance and it shows that Charles doesn’t care what you think…you’re justified in being concerned, as there are always unknowns.”
“We determined that Super Micro’s connections with both disclosed and undisclosed related parties create a breeding ground for questionable accounting,” the report stated.
Disclosed related party suppliers Ablecom and Compuware, managed by Liang’s brothers, have garnered $23 million in payments over the last three years. Ablecom is also partially owned by Liang and his wife.
In addition, SuperMicro’s exports of advanced components to Russia have surged almost threefold since the onset of the Ukraine invasion in 2022, seemingly breaching U.S. export restrictions, according to Hindenburg’s analysis of over 45,000 import and export records.
Approximately two-thirds of Super Micro’s exports to Russia since the invasion align with “high priority” components that the Russian military may be reallocating for battlefield use, according to warnings from the U.S. government, the report stated.
Super Micro did not reply to requests for comments. The shares had declined 2.7% to $60.66 at the last check, and SuperMicro shares have fallen nearly 40% year-to-date.
TheStreet Pro’s Bruce Kamich, who has applied technical analysis in his stock evaluations for fifty years, cautioned investors to “keep their powder dry” months ago regarding SuperMicro. He now asserts that the firm’s stock price has been on a downward path since peaking in March, with trends indicating “sellers of SMCI being more active than buyers.”
“I perceive a setup indicating we will witness lower prices in the forthcoming weeks,” he remarked. “Stock prices are trading below the rising 40-week moving average line.”
Kamich indicated that he possesses “no specific insights regarding the Hindenburg Research report on SMCI,” but noted that “the downward trend in price has persisted for several months, and I don’t see indicators of a bottom.”
“Investors should be cautious,” he advised.
