On August 28th Eastern Time, the AI "internet celebrity stock" Super Micro Computer experienced a sharp drop during trading, closing down 19.02%. After the market closed, it fell another 6.99%.
Supermicro Computer has previously stated that it will postpone the disclosure of its annual financial report, stating that the 10-K annual report for the 2024 fiscal year ending June 30 is expected to be submitted on time and requires more time to complete the evaluation of the effectiveness of internal control design and operation of financial reporting. It also claims that the company has not made any modifications to the previously announced fiscal year and quarterly results ending on June 30, 2024. As a convention, the 10-K annual report is usually more detailed than the fiscal year annual report.
The reason for the sharp decline in the company's stock price is that it has been targeted by short selling institutions.
On August 28th, short selling firm Hindenburg Research released a report shorting this server equipment manufacturer. The reasons are as follows.
1. Previous allegations of accounting manipulation
In August 2020, the US Securities and Exchange Commission (SEC) accused Supermicro of extensive accounting violations, including early recognition of revenue, pre shipment recognition of revenue, and sending incomplete or improperly assembled goods to customers. The SEC accuses Supermicro of illegally pre confirming over $200 million in revenue from fiscal years 2015 to 2017.
In 2018, Supermicro Computer was delisted from NASDAQ due to two consecutive years of failure to submit financial statements. Re listed in 2020.
2. Related party transactions and sanctions evasion
The founder and CEO of Supermicro Computer, Liang Jianhou, was born in Taiwan, China. The SEC accuses Ablecom Technology, a related company led by Liang Jianhou's brother, of conducting billions of dollars in annual related party transactions with Supermicro Computer.
According to the report, Liang Jianhou has three younger brothers who have founded different technology companies, all of which are supply chain enterprises for Supermicro computers.
In addition, the short selling report also pointed out that Supermicro Computer has rehired several employees related to the aforementioned illegal accounting practices.
3. Continued improper revenue recognition.
The illegal income recognition of Supermicro computers seems to be continuing.
In April 2024, Bob Luong, former General Manager of Global Services at Supermicro Computer, filed a lawsuit accusing the former owner of false revenue recognition after being relisted in 2020.
The testimony of this former employee became an important basis for Hindenburg's short selling report. The former employee claimed that the company's sales team works with distributors at the end of each quarter to inflate numbers. In addition, he also stated that about 40% of the GPU servers shipped by Supermicro computers have malfunctioned. Such a high failure rate is simply unbelievable.
4. Other corporate governance issues
Kevin Bauer, the former CFO of Supermicro Computer, resigned shortly after helping to relist the company and resolve SEC charges. Short selling reports suggest that he may have been forced to leave.
The report points out that SMCI's core product server is facing fierce competition from peers such as Dell Technologies and HP Enterprises, and its gross profit margin is also declining.
Supermicro Computer is one of the top three server manufacturers in the world, and will only fully transform into AI server business in 2022, with advanced layout in the field of liquid cooling technology. The company is strongly tied to Nvidia and heavily relies on the latter's chip supply. In addition, the bosses of both companies are from Taiwan, China, China, and there is a certain degree of personal friendship.
According to the announcement released by Supermicro Computer on August 6th, the company's revenue for the fiscal year 2024 (July 1, 2023 to June 30, 2024) was $14.94 billion, an increase of 109.7% compared to the same period last year's $7.123 billion; Net profit was 1.208 billion US dollars, an increase of 89% compared to the same period last year's 640 million US dollars.
Although the revenue is decent, the gross profit margin and profitability have significantly declined. In the second quarter of 2024 (corresponding to Q4 of its fiscal year 2024), the gross profit margin of Supermicro Computer decreased from 17.01% in the same period last year to 11.23%; Earnings per share were $5.51, far below market expectations of $7.95. On August 7th, after the release of the financial report, Supermicro Computer fell 20.14%.
Over the past year, supercomputers have been one of the biggest beneficiaries of the artificial intelligence boom. Its stock price surged 15 times from around $80 in early January 2023 to $1200 on March 8, 2024, with a high turnover rate, earning it the nickname of an AI internet celebrity by market participants. Its increase is higher than that of the giant NVIDIA during the same period. On August 28th, Nvidia's stock price fell 2.1%, with a 6.89% drop after hours due to lower than expected financial reports.
After a significant fluctuation, the current stock price of Supermicro Computer is only one-third of this year's high point.
Any enterprise or individual will have moments of glory and moments of darkness.