Super Micro Computer (SMCI +0.73%), also known as Supermicro, recently suffered a major setback after federal agents arrested its co-founder and board member, Yih-Shyan "Wally" Liaw. Liaw was accused of violating U.S. export controls by smuggling equipment loaded with Nvidia's (NVDA +1.65%) AI chips into China in a scheme that generated $2.5 billion in sales since 2024. The indictment alleges that Liaw, along with a general manager and contractor, used a Southeast Asian company as a middleman to send the hardware to China.
Liaw and his accomplices allegedly used fake paperwork to identify the Southeast Asian company as the end user of its AI servers, hired a separate logistics company to repackage the hardware for shipments to China, and deployed "dummy" servers at the Southeast Asian company to deceive Supermicro's own compliance team and a U.S. export control officer.
Image source: Getty Images.
Liaw resigned from Supermicro's board after his arrest, but the scandal drove the company's stock to its lowest levels in over a year. Does that pullback represent a buying opportunity?
Another black eye for Supermicro
This debacle isn't the first time Supermicro ran afoul of regulators. Back in 2006, the company was fined for violating U.S. sanctions by indirectly exporting its motherboards to Iran. In 2019, it stopped outsourcing its production to Chinese contract manufacturers amid allegations that those partners were secretly installing spy chips into its motherboards.
From 2018 to 2020, Supermicro was temporarily delisted from the Nasdaq following an investigation by the Securities and Exchange Commission (SEC) into its accounting practices. In 2024, a prolific short-seller pointed out that Supermicro had rehired many of the executives involved in the accounting scandal and accused it of stuffing its sales channels with "partial orders" of defective products to inflate sales. Supermicro subsequently delayed its 10-K filing for fiscal 2024 (which ended in June 2024). Its longtime auditor, Ernst & Young, also resigned, and the company faced new probes from the SEC and the Department of Justice (DOJ).
NASDAQ: SMCI
Key Data Points
This pullback isn't a buying opportunity
Supermicro seemingly placated the regulators by hiring a new auditor and finally filing its delayed 10-K last February, but these new smuggling charges indicate it isn't out of the woods yet. Nvidia, which provides most of the high-end GPUs used in its liquid-cooled AI servers, could halt its shipments to Supermicro to distance itself from the scandal. If that happens, Supermicro's sales will plummet as its customers buy more AI servers from Hewlett-Packard Enterprise, Dell Technologies, and other hungry competitors.
Supermicro's stock might seem undervalued at less than one times this year's sales, but it deserves that discount valuation. The latest allegations make it impossible to trust the company's management, so I'd avoid it and stick with more promising AI stocks instead.
