Super Micro Computer (SMCI), a leading player in data center solutions and AI technologies, has faced significant short-selling pressure following a bearish report alleging misconduct in the company’s operations. Although the drop in share price has made SMCI more attractively valued, I do not see this as a clear buying opportunity. Instead, I am adopting a Hold stance on the company’s shares.

Many investors are attracted to AI-related stocks for their long-term potential, especially given the sizable addressable market in AI servers, as demonstrated by Super Micro Computer. The company has reported revenue growth exceeding triple digits growth in recent quarters. However, the unconfirmed allegations introduce a level of speculation that complicates the assessment of their seriousness.

Therefore, investors should exercise caution—where there’s smoke, there’s often fire. The significant risks surrounding SMCI could easily undermine any bullish outlook.

Understanding the Hindenburg Research Report

To explain my neutral stance on Super Micro Computer shares, it’s important to highlight that the stock has dropped more than 30% since the publication of a report by Hindenburg Research, a short-selling firm (which holds a short position in SMCI). The report accuses the AI-focused company of accounting manipulation, among other claims.

According to Hindenburg, after a three-month investigation, it identified several accounting red flags, including undisclosed related-party transactions, sanctions violations, export control failures, and customer issues.

In simpler terms, this could imply that Super Micro Computer is allegedly selling its products to businesses it is somehow connected to. For example, management might have an ownership stake in these businesses, or the company itself could own a portion of them. These related-party transactions could involve sales between entities that share significant connections.

The situation casts doubt on the quality of Super Micro Computer’s reported sales and earnings. It suggests that demand may not be organic—rather, it could be artificially inflated through these connections.

This raises questions, especially since Super Micro Computer has reported revenue growth of more than 143% and 200% in recent couple of quarters, driven by strong demand for its servers. Given this, artificially inflating sales wouldn’t seem necessary, as the company’s organic growth has already been exceptional.

Should Investors Worry About the SMCI Short Seller Report?

Part of my skepticism about SMCI’s investment thesis now stems from the idea that “where there’s smoke, there’s fire.” It’s important to remember that short-seller reports are designed to drive down a stock’s price. These firms stand to profit if the stock falls, as they’ve taken a position betting on that decline.

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While debating the legality of short-selling is complex, the reality is that short-sellers are incentivized to publish negative information about a company, profit from the short position, and capitalize when the stock price drops.

However, what’s most concerning for Super Micro Computer investors is the company’s management response to these allegations. CEO Charles Liang publicly denounced Hindenburg Research’s accusations as false. Yet, what raised eyebrows was the company’s decision to delay its annual report.

This delay could suggest that Super Micro Computer is reviewing its reporting standards or pricing practices, potentially indicating misconduct. The company may need time to adjust its financials to ensure compliance with SEC regulations.

It’s also worth noting that back in August 2020, Super Micro Computer settled with the SEC for $17.5 million over widespread accounting violations. Interestingly, despite this, some senior executives involved in that scandal were later rehired, indicating that fundamental changes may not have taken place.

In a similar vein, Hindenburg Research, known for its accurate identification of fraud in its 2020 accusations against Nikola (NKLA) and its 2023 report on Icahn Enterprises (IEP), has raised concerns about misleading practices leading to SEC charges.

When Might SMCI Present a Buying Opportunity?

Given the current uncertainty, the risk of staying on the sidelines is that if the allegations against Super Micro Computer fail to materialize or have little impact on the company’s fundamentals, it could present a significant buying opportunity at a discount. I maintain a neutral stance on this matter, balancing caution with the potential for long-term gains.

Some Wall Street analysts are already advising this approach. Northland’s Nehal Chokshi, for example, considers all the bearish arguments in the Hindenburg Research report to be unfounded, predicting they will prove “innocuous.”

Regarding the delay in the company’s annual filings, Chokshi believes this is due to “testing the efficacy of incremental internal controls across multiple business functions.” Importantly, although Super Micro Computer reviewing its internal controls, the company has stated it does not expect to restate its financials, which is certainly a positive sign.

Since the stock has sold off by around 35% following the bearish report, shares now trade at a much more attractive valuation, with a forward P/E of 11.5x compared to the levels above 45x seen in March of this year.

If things go well for Super Micro Computer, the allegedly manipulated revenues may not be significant enough to alter the medium- to long-term potential of the company, especially considering the massive addressable market for AI servers, projected to be nearly $430 billion over the next decade.

Is SMCI A Buy, According to Wall Street Analysts?

Following the Hindenburg Research report, several analysts downgraded SMCI stock and lowered their price targets. Despite this, the current consensus remains bullish with a “Moderate Buy” rating and an average price target of $978.50. This suggests a significant upside potential of 145.49% based on the latest share price.

See more SMCI analyst ratings

Key Takeaways

Super Micro Computer’s stock has certainly taken a black eye from the misconduct allegations by Hindenburg Research, and it will likely take time to recover investor sentiment. Consequently, I am adopting a Hold stance on the stock. While the company’s delayed annual report raises concerns, it denies the allegations and does not expect to restate its financials. Given the large AI server market opportunity and growth potential, this could still present a buying opportunity if the allegations prove unfounded. Caution is advised, but the long-term potential remains.

Disclosure