Following the Labor Day holiday in the U.S., Super Micro Computer (SMCI 1.10%), 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?
NASDAQ: SMCI
Key Data Points
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.
Image source: Getty Images.
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.
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?
SMCI PE Ratio (Forward) data by YCharts
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.
