Super Micro Computer (SMCI +2.94%), also known as Supermicro, is in a tailspin. Hindenburg Research recently released a short-seller report about the tech company, alleging that it is once again involved in manipulating its numbers. That has put investors into panic mode. Supermicro's shares have been down more than 30% in the past month.
Investors were already starting to grow concerned about artificial intelligence (AI) stocks such as Supermicro becoming too expensive, and now there are worries about the overall business itself, including its internal controls and how legitimate its numbers are. Does this short-seller report raise flags about Supermicro that should keep you away from the stock, or could its reduced price simply make now a good time to take a contrarian position in the company?
NASDAQ: SMCI
Key Data Points
Hindenburg alleges accounting manipulation
According to the Hindenburg report, after interviewing ex-employees and industry experts and reviewing documents, the research firm believes there are "glaring accounting red flags" suggesting that revenue may be overstated and internal controls may not have been followed. Hindenburg says the people involved in an accounting issue that took place years ago are still involved with the business today.
In 2020, the Securities and Exchange Commission (SEC) charged Supermicro and then CFO Howard Hideshima with understating expenses and recognizing revenue too aggressively from its 2015 to 2017 fiscal years. The fine was $17.5 million. And in 2018, the stock was also temporarily delisted for not filing its financial statements on time.
What should investors make of the report?
Short-seller reports are often biased and can contain incomplete and one-sided information. A few things about this one stand out to me.
For starters, the ex-employees interviewed for the report seem to primarily be sales reps and directors, who would presumably be unfamiliar with accounting policies and controls. And in any business, there will always be pressure to push as much through as possible at the quarter's end to help meet targets, which the report alleges.
Supermicro's current CFO, David Weigand, took on the role in 2021 and has been with the company only since 2018, having previously worked at Hewlett Packard Enterprise. CFO is the company's most important accounting role, and Supermicro changed that position because it got into trouble with the SEC.
The Hindenburg report tries to suggest that Weigand has looser oversight and internal controls than predecessor Kevin Bauer, who left the company after helping it relist and resolve its financial problems. But that's speculative at best. With a different CFO at the helm, there's no reason to suggest that the company is applying the same accounting practices and policies that previously raised concerns.
As with any short-seller report, investors shouldn't give it too much importance or allow it to influence their decision-making without substantiated evidence.
Supermicro's business has been booming, and demand for its AI servers and infrastructure is skyrocketing. The company is coming off a strong fiscal year for the period ending June 30, in which net sales of $14.9 billion more than doubled the previous year's tally of $7.1 billion. Net income of $1.2 billion also jumped significantly from $640 million a year ago. With such solid numbers and demand for its products, Supermicro doesn't strike me as a business that needs a whole lot of help at the quarter's end or year's end to boost its numbers.
Should you buy Supermicro stock?
A short-seller report can be scary, but investors must take it with a grain of salt. The information could come from disgruntled ex-employees or those unfamiliar with the matters at hand. There's nothing from Hindenburg's short-seller report that makes me think Supermicro's business is in serious trouble, as it seems to refer heavily to trouble the company got into before its new CFO took over.
This could be a good time for investors to take advantage of the potentially irrational fear surrounding Supermicro stock. At a price that's 13 times its estimated future profits (based on analyst estimates), the tech stock could prove to be a steal of a deal.
