Hindenburg Research Bolsters Super Micro Computer (SMCI) Fundamentals

Priced at $451 per share, Super Micro Computer (NASDAQ: SMCI) stock has fallen into deep discount territory

Priced at $451 a share, Super Micro Computer (NASDAQ:SMCI) stock has fallen into deep discount territory, both against the 52-week high of $1,229 and the 52-week average of $606 a share. The culprit for SMCI’s 30-day drop by 22% is the recent Hindenburg Research report.

On August 27, the investment research group disclosed a short position on SMCI stock based on a three-month investigation alleging “accounting red flags,” suspect hiring practices, circumventing exports to Russia, and Super Micro’s corporate culture.

A day later, Supermicro delayed its Form 10-K filing to the SEC, which was supposed to show the company’s annual report ending June 30. Last Friday, on August 30, this situation was compounded by DiCello Levitt LLP filing a class action lawsuit against Super Micro, alleging misleading reports on revenue growth and product demand.

DiCello Levitt cites the Hindenburg Research report as the lawsuit’s jumping ramp. But when all dust is settled, what is Supermicro’s bottom line as a major supplier of data center servers? Despite the recent turmoil, SMCI shareholders are up 58% year-to-date. Is this a rare opportunity for investors to buy the proverbial dip?

The Meat of Super Micro’s Hindenburg Research Report

As the concluding reason for its short position, Hindenburg calls Supermicro a “serial recidivist.” This reflects the report’s focus on the company’s past friction with regulatory agencies, specifically its temporary delisting from Nasdaq in 2018 for delaying financial statements and accounting violations in 2020.

After the SEC’s $17.5 million settlement, Hindenburg’s researchers pointed out that Supermicro rehired the culprits for the accounting malpractice, which was relayed to them by former Supermicro employees. In turn, the company resumed its previous practices of “improper revenue recognition,” including incomplete sales and circumventing internal accounting controls.

There are also allegations of nepotism, as Supermicro’s current CEO’s brothers control Ablecom and Compuware. Both companies owe over 99% of their exports to Supermicro. The assumption is that this relational accounting risk is also transferred to the CEO’s brother operating in Hong Kong and Taiwan as these entities resell Supermicro products.

At the same time, investors should note there is not much controversy surrounding Nvidia (NASDAQ:NVDA) and AMD CEOs, as first cousins once removed.

Among other allegations, Hindenburg purports that Supermicro violated sanctions against Russia, having allegedly sold $46.3 million worth of high-grade IT solutions to Russia via Moscow-based Niagara Computers. Interestingly, the report admits that Niagara Computers is not on any OFAC sanction list.

At the end of the line, it appears that the Hindenburg Report is rehashing settled issues, at least according to last Tuesday’s note by JPMorgan analysts.

“As we dig into the details of the report, we believe there to be limited evidence of accounting mistreatments beyond revisiting the 2020 charges from the SEC, and limited new information relative to the existing and already known business relationship with related companies owned by the siblings of the founder of SMCI,”

Furthermore, JPMorgan views the Hindenburg report as “largely void of details around alleged wrongdoings from the company.” This aligns with Hindenburg’s large focus on Russia sanctions but having represented little meat beyond listing numerous relationships prior to sanctions.

This brings into focus Super Micro’s bottom valuation line: how important is the company in the global data center/IT/AI business?

Hindenburg Bolsters Super Micro’s Fundamentals

Ironically, the Hindenburg Research report on Supermicro makes a strong case for the company’s fundamentals, citing demand across China and Russia for high-grade server stacks, supercomputers, high-tech surveillance and generative AI infrastructure.

But to countervail this, the report cites Nvidia’s CEO Jensen Huang endorsement of Supermicro’s competitor Dell Technologies, stated in May 2024:

“Nobody is better at building end-to-end systems of very large scale for the enterprise than Dell.”

As of Q1 2024, SMCI holds 5.86% market share against Dell’s 51.40% in the computer hardware sector, which is one of the reasons why Dell is now deemed as an under-the-radar AI powerhouse. With that said, Supermicro is unlikely to lose capital inflows amid continued IT upgrades of large enterprises.

The very same month that the Nvidia CEO endorsed Dell, Supermicro received a massive order of upcoming Blackwell AI chips for the next-gen data centers. According to Taiwan Economic Daily

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