Day: September 6, 2024

Following the Labor Day holiday in the U.S., Super Micro Computer (NASDAQ: SMCI), or Supermicro as it is commonly called, responded to a recent short-selling report from Hindenburg Research. The company sent a letter to its customers and partners and put the letter in a filing with the SEC.

The question is, should company’s response ease investors’ concerns?

Short report and response

Last week, Hindenburg — which has a short position in Supermicro and thus benefits when the stock drops — raised several issues with how Supermicro does business. The allegations included evading sanctions and shipping banned components to Russia, management self-dealing, and accounting manipulation.

The day after Hindenburg released its report, the company announced that it would delay filing its fiscal 2024 annual report with the Securities and Exchange Commission (SEC). Management said it required additional time to review the “design and operating effectiveness of its internal controls over financial reporting.”

Some investors have been particularly worried by these turns of events as the company was fined by the SEC in 2020 for recognizing revenue early and understating expenses. CEO Charles Liang was not charged with any wrongdoing but, according to the SEC, had to “reimburse the company $2.1 million in stock profits that he received while the accounting errors were occurring.” Prior to that in 2018, the Nasdaq Composite suspended and then temporarily delisted the stock for not filing its financial statements on time.

The release of Hindenburg’s report and its latest filing delay hammered the stock.

In Liang’s letter Tuesday to its customers and partners, Supermicro said that neither the short report nor the filing delay will impact its products or services. It added that its liquid-cooled solutions continue to ramp up and that it remains well positioned.

Meanwhile, it said it does not expect the delay to have any material impact on its fiscal Q4 or full-year results. It added that the short report contained “false or inaccurate statements” and misrepresented information that it had already shared publicly. Finally, the company said it would “address [Hindenburg’s] statements in due course.”

The denial was pretty standard. Meanwhile, it wasn’t great that the company’s first action after the short report was to delay its 10-K filing, especially given its past history.

Margin issues

While the short-seller’s report and delayed filing have grabbed investors’ attention, they are not the only issues that Supermicro has been dealing with lately. The company’s stock sank 20% in early August following its fiscal Q4 results after it reported very disappointing gross margin.

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Gross margin, which greatly impacts profitability, came in at only 11.2% in fiscal Q4, down from 17% a year ago and 15.5% the previous quarter. Among the reasons for the decline, the company blamed reduced pricing in order to win new designs and the high costs to ramp up its direct liquid cooled (DLC) rack scale AI GPU clusters. It expects its gross margin to gradually improve throughout its new fiscal year and to return to the 14% to 17% range.

Different industries have different margin profiles, but gross margin can tell a lot about a company and how valuable its offerings or services are. Semiconductor companies riding the artificial intelligence (AI) buildout have much higher gross margin. Nvidia had gross margin of 75.1% last quarter, while Broadcom‘s was 74.8% and Advanced Micro Devices‘ was at 49%. Even a foundry operator like Taiwan Semiconductor Manufacturing had gross margin of 53.2% last quarter.

Supermicro has structurally low gross margin, well below other companies that are riding the AI infrastructure wave. And despite the company being in one of the best demand environments for AI infrastructure possible, its gross margins still worsened. That’s concerning.

Is the stock a buy now?

Trading at a forward price-to-earnings (P/E) ratio of just under 13, Supermicro’s valuation is no longer frothy.

However, this is a low-margin company with a history of accounting issues that just delayed filing its annual report. Yes, it’s benefiting from the AI infrastructure buildout, but it’s not a company with differentiated technology, like Nvidia, or one that has the scale and tech advantages, like TSMC. Dell and Hewlett Packard Enterprise, for example, are server companies that also offer direct liquid cooling.

As such, I’d stay on the sidelines, as there are better ways to play AI infrastructure with companies that have higher margin and less controversy.

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Should Super Micro Computer’s Response to Short-Selling Report Ease Investor Fears? was originally published by The Motley Fool

Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is one of the greatest investments of all time.

If you had put $1,000 into the company nearly 60 years ago when Warren Buffett took over the company and kept it there, you would have more than $44 million today. Not many stocks can beat that record.

Buffett has earned his reputation as the greatest investor of all time. Berkshire has grown to a market value of more than $1 trillion, not through any brilliant innovation or brand advantage, but through Buffett’s disciplined investing approach and market-beating strategies.

Buffett has excelled both as a stock investor, making billions from stocks like Apple, and as an acquirer of companies such as GEICO, Burlington Northern Santa Fe, and Precision Castparts.

Combining those two investment techniques, Buffett has built his conglomerate into an empire of wide-moat businesses that can survive and thrive no matter what happens in the economy.

Berkshire’s capital allocation strategy is also unique. Unlike most companies of its size, especially slow-growing ones like Berkshire, it does not pay a dividend.

Buffett’s dividend philosophy

Investors have long understood that capital allocation approach as a trade-off that’s in their best interest as it gives Buffett more capital to work with to invest in stocks or go elephant hunting, his term for making a big acquisition.

As an investor, Buffett seems to prefer dividend stocks as nearly all of his top holdings offer a payout, and he has traditionally preferred reliable value stocks over growth stocks, which are less likely to pay dividends.

Buffett later called the one time his company paid a dividend, in 1967, “a terrible mistake,” implying that that capital would have been better off being reinvested in the company.

He also has a test he likes to apply to dividends, saying, “The test about whether to pay dividends is whether you can continue to create more than $1 of value for every dollar you retain.”

Will Berkshire ever pay a dividend?

Investors are unlikely to ever demand a dividend from Buffett. They simply have too much respect for him, and his argument against paying one has clearly been borne out by his track record.

However, the argument for Berkshire to pay one seems to be getting more credible. The larger the company gets, the harder it becomes for it to make needle-moving acquisitions, something Buffett has acknowledged several times.

In his most recent shareholder letter, Buffett noted that the days of it having plenty of acquisition targets to choose from “are long behind us,” adding, “size did us in.” Buffett also said, “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire.”

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At the same time as Buffett seems to be bowing out of the acquisitions game, Berkshire’s cash hoard has also surged over the last year, becoming far larger than at any time in its history.

Buffett’s conglomerate now holds $277 billion in cash and Treasury bills, and that sum has soared recently.

That cash balance, which surged in part because of a large sale of Apple stock, could signal that Buffett is preparing for a big acquisition or investment, but it could also mean that he thinks the market is overvalued. In that case, he’d rather bide his time and wait for a pullback to scoop up bargains than overpay for a stock or a company.

Prediction: Berkshire will pay a dividend

At 94 now, Buffett won’t be running Berkshire forever. Its next CEO (said to be Greg Abel) will have a harder time defending the lack of a dividend, especially with nearly $300 billion in cash on the balance sheet and limited acquisition opportunities.

Even the argument that Buffett consistently crushes the market isn’t as salient as it once was. Over the past 10 years, Berkshire’s performance has essentially matched the S&P 500 on a total return basis (see chart below).

Taking that chart into account and Buffett’s own admission that his company essentially has no more needle-moving acquisitions to make, the argument for superior capital returns from Berkshire doesn’t really hold the same weight.

With his company now worth $1 trillion, Buffett has beaten the final boss of investing. There’s little more he can do at this point it seems, and holding investor cash in Treasuries seems less desirable for them than returning some of that wealth in the form of a dividend so that they can spend it or invest it as they see fit.

Berkshire could make one more big deal with Buffett at the helm, but it looks increasingly unlikely.

At one point it would’ve been unthinkable for Berkshire to pay a dividend, but times have changed. I wouldn’t expect the company to pay a dividend while Buffett is still in the CEO’s chair, but it makes sense to pay one eventually, probably within the next 10 years.

Berkshire, which has been throwing billions at share buybacks in recent years, can easily afford to pay a dividend, and doing so would be the best way to reward investors who have stuck with Buffett over the years.

Doing so isn’t undermining Buffett’s legacy. It’s honoring it. Letting investors share in Berkshire’s massive winnings without having to sell their stock is a testament to both Buffett’s long-term philosophy and shareholder-friendly approach to capital.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Could Berkshire Hathaway Do the Unthinkable? was originally published by The Motley Fool