Shares of Super Micro Computer Inc. (SMCI) fell sharply on Tuesday following a critical report from short seller Hindenburg Research, which accused the company of persistent accounting irregularities and governance issues. The stock, which had already been volatile, experienced an initial drop of up to 8.7% in premarket trading before stabilizing at a 2% decline by mid-morning.
Hindenburg Research's detailed report, based on a three-month investigation, highlighted several red flags surrounding Super Micro's business practices. The firm alleged "glaring accounting red flags," failure to disclose related party transactions, and lapses in sanctions and export controls. The report also suggested that the company's senior executives, some of whom had left following a $17.5 million SEC settlement in August 2020, were rehired despite their previous involvement in the controversies. "Almost all of them are back. Almost all of the people that were let go that were the cause of this malfeasance," a former salesperson is quoted as saying.
Super Micro, a key player in the data center server market and a major beneficiary of the artificial intelligence boom, has faced scrutiny before. In 2020, the company settled with the SEC over accounting violations from fiscal years 2014-2017, agreeing to rectify its financial statements and pay penalties. Despite this, Hindenburg's report claims that issues persist. "All told, we believe Super Micro is a serial recidivist," the short seller said in its findings, criticizing the company's governance and product quality.
The report has cast a shadow over Super Micro's impressive performance this year. The company's shares soared from around $290 in January to over $1,200 by March, driven by high demand for AI-related technologies and its association with Nvidia Corp., a major supplier of AI chips. However, the stock has since fallen about 50% from its peak but remains up approximately 90% year-to-date. The company is also preparing for a 10-for-1 stock split effective October 1.
Market reactions to the Hindenburg report have been notable. Analysts like Woo Jin Ho from Bloomberg Intelligence suggest that the report could intensify scrutiny on Super Micro's accounting practices and client transactions, especially amidst heightened regulatory focus on AI systems sales to sanctioned entities. "Hindenburg's concerns might intensify the spotlight on client relationships, especially given heightened US scrutiny," Ho noted.
Super Micro's recent financial performance underscores its rapid growth amidst the AI boom. The company's revenue more than doubled to $14.9 billion for the fiscal year ending in June, and it has forecasted revenues of about $28 billion for the current fiscal year. Despite the significant drop from its March peak, Super Micro's shares have still gained over 80% this year, reflecting the broader enthusiasm for AI technologies. The company's stock was a major component in the Russell 2000 Index and was added to the S&P 500 Index in March.
However, there are concerns about the profitability of AI-optimized servers. The high costs associated with advanced chips from Nvidia and other suppliers result in lower margins for these products compared to other server solutions. This issue could impact Super Micro's financial performance moving forward.
Hindenburg Research, known for its critical reports on various companies, has previously targeted firms like Axos Financial Inc. and Icahn Enterprises LP. The firm's recent focus on Super Micro highlights ongoing tensions in the tech sector, particularly around companies benefiting from the AI boom but facing governance and compliance challenges.
