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, allegedly having 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 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, accounting for 10,000 GB200-based Blackwell servers, this would amount to 25% of total supply. Alongside SMCI’s liquid cooling solutions necessary for HPC/AI workloads, Hindenburg report readily admits that the company could see further growth driven by AI demand. On the downside, the report cites decreasing Supermicro gross margins, going down from 17.1% in Q4 FY23 to 11.2% in Q4 FY24. However, this didn’t stop SMCI’s acquisition of more orders and expansion of supply chains during 2024, as it is widely understood that the sector is competitive. Case in point, Dell’s CFO Yvonne McGill admitted in Q1 FY25 earnings call that AI optimized servers are “margin rate dilutive than margin dollar accretive.”This is a way of saying that Dell’s data center profitability (ISG division) is not up to par with its other divisions, but rather relies on “premium for the value that we’ve generated or accreted into our products”.In contrast to Dell’s OEM business model with value-added features, Supermicro focuses on more flexible and cost-effective customizable products and faster time-to-market response.
Super Micro’s Revenue Growth So Far
For fiscal Q4 2024 earnings ending June 30th, Super Micro Computer reported $5.31 billion net sales compared to $2.18 billion in the year-ago quarter. Although the company’s gross margin (non-GAAP) decreased from 17.1% to 11.2% in that period, net income increased from $193.5 million to $352.7 million. Just like Nvidia, Supermicro tracked triple-digit growth, having its revenue increased by 143% year-over-year. From an investor expectations standpoint, the company beat earnings per share estimates in Q4 ‘23 and Q1 ‘24 but failed to beat Q2 ‘24 EPS at 27% negative surprise, having reported $5.51 vs forecasted $7.56 EPS.SMCI’s forward price-to-earnings ratio is 12.87 against the trailing P/E of 21.79, indicating that investors expect further Super Micro growth, which is backed by existing large orders for Blackwell-based servers.
Super Micro’s Bottom Line
Even if there is more meat to the company’s accounting allegations, which failed to impress JPMorgan analysts, Super Micro’s potential fine is unlikely to upset its bottom line. Enterprises, big and small, will continue to spend on servers. Gartner’s global forecast in July projects 25.3% growth in the data center sector, driven largely by solutions to optimize AI workloads. Given that this is Super Micro’s focus, backed by established reputation and more orders, SMCI shareholders should see this reflected in the stock’s future valuation. By Gartner’s estimates, server spending should triple to $200 billion by 2028.In terms of SMCI’s price forecasting, its average price target is now $674.67 per share. Against the current price of $451, this would constitute nearly 50% upside. Nasdaq’s forecasting data further points to $1,300 SMCI price as the upper ceiling twelve months ahead, with $325 as the least optimistic forecast. More By This Author:Stocks To Watch Today: Tesla, Boeing, And Intel
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