Supermicrocomputer (NASDAQ: SMCI) has been one of the biggest winners of the AI boom so far. Revenue has soared, hitting record highs as customers rushed to order the company’s latest servers and workstations for their data centers. This has helped boost its stock price, even outperforming market star Nvidia in the first half of the year, and Supermicro gains spots in the S&P 500 and the Nasdaq-100 this year.
But this success story recently hit a bump in the road in the form of a short report from Hindenburg Research, in which the company claimed that the equipment maker was in trouble. Short sellers have a financial incentive to drive down the price of the stock they are shorting, so you should always keep that in mind when reading a “short report.”
Shares of Supermicro have fallen more than 20% since the report in late August, causing its valuation to fall. You may now be wondering whether you should avoid Supermicro or buy the dip.
The short report
First, let’s look at Hindenburg Research’s position. The company was short Supermicro stock when it released its report, meaning it stands to profit from declines in the stock. In short selling, a buyer borrows shares and sells them, thinking the price will fall. The short seller then buys the shares back at a lower price and returns them to the owner, pocketing the difference between the price he sold the shares for and the price he paid to buy them back.
Because Hindenburg has a short position in Supermicro shares, it has some bias toward a decline in the stock. That’s something to keep in mind as you weigh the report. Hindenburg covers a lot of ground, with allegations ranging from “undisclosed related party transactions” to “export control failures.” The company said it conducted a three-month investigation, including interviews with several former Supermicro employees and reviews of court filings and other documents.
And in bad timing for Supermicro, the Hindenburg report happened to be released the day before Supermicro announced it would delay the filing of its annual 10-K report. The delay further shook investor confidence in the company. What’s more, investors may have a flashback to 2020, when Supermicro was accused of “improper accounting” and fined $17.5 million.
Keeping an eye on the facts
While this kind of news can easily make investors question a company, it’s important to keep your eyes on the facts and what you know for sure. As mentioned, Hindenburg stands to benefit from any decline in Supermicro stock, so there’s a bias there. And investors don’t yet have solid facts from another source that confirm Hindenburg’s allegations.
Meanwhile, Supermicro has sent a letter to customers and partners saying the short report “contains false or inaccurate statements about our company, including misleading presentations of information we previously shared publicly. We will address these statements in due time.”
And, importantly, Supermicro also said, regarding the delayed 10-K, “we do not expect any material changes to our financial results for the fourth quarter or fiscal year 2024.”
Finally, it’s important to remember that Supermicro’s previous charge in 2020 doesn’t necessarily mean the company is in similar trouble now. So while investors should keep a close eye on this situation, there’s no concrete reason to sell Supermicro stock today.
A major AI player
But is the stock worth buying now? Supermicro has proven itself to be a major player in the AI world in recent years. Its most recent quarterly revenue of $5.3 billion is expected to surpass the company’s annual revenue in 2022.
The only negative in the recent earnings report was gross margin, which fell to about 11% from 17% a year ago. But the company said that was due to temporary headwinds, such as efforts to ramp up production of direct liquid cooling, and set a target of 14% to 17%. And Supermicro has said that its long-term goal is for a new factory in Malaysia to increase volume at a lower cost. That should play a significant role in the margin picture.
Despite the optimistic outlook, cautious investors may want to stay on the sidelines as the Hindenburg Report unfolds and until Supermicro files its annual report. If you’re already a shareholder, you may want to sell and lock in some profits.
But if you can handle some risk and don’t mind short-term volatility, take a look at Supermicro’s valuation of 12 times earnings estimates — and consider buying a few shares. That seems like a dirt-cheap price for a company that has delivered so much growth, and its revenue should continue to soar as the AI boom continues.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
After the Hindenburg Report: Is Super Micro Computer Stock a Buy or a Sell? was originally published by The Motley Fool
