The excitement behind artificial intelligence has driven the market to record highs. Any company that can connect its operations to the future of artificial intelligence has seemingly done well, promising huge demand for its products or services from a new and untapped market.
But as valuations have soared, short sellers have moved in, trying to find stocks that can’t live up to the promise or hype. Short sellers have specialized in the computer server and cloud provider Super microcomputer (NASDAQ: SMCI) and the telecommunications company Lumen Technologies (NYSE: LUMN). Wall Street analysts tell investors to sell one and hold the other. Let’s see.
Lumen Technologies operates one of the largest interconnected fiber optic cable companies, bringing high-speed internet, cable television and telephone services to consumers and businesses. Lumen shares are up about 250% this year, largely due to the belief that the fiber optic network will serve as critical infrastructure for connecting data centers needed to power artificial intelligence. Lumen reported in August that demand for AI has led to $5 billion in new revenue.
However, short sellers like Kerrisdale Capital are starting to question the company’s valuation and how much it can really benefit from the AI boom. In late August, Kerrisdale suggested in a brief report that buying into the AI hype around Lumen is premature and that the $5 billion in new production is “a desperate attempt to raise cash amid deteriorating revenues and growing liquidity problems.” Furthermore, Kerrisdale states that Lumen’s future sales opportunities are not with leading technology companies using AI, but with older, more legacy companies that are still in discovery mode when it comes to AI.
Wall Street seems to agree with Kerrisdale. Of the eight analysts cited by TipRanks, none are telling investors to buy the stock; there are five hold and three sell ratings. On Wall Street, this might as well be a sell recommendation. The average analyst price target is $4.09, implying a downside of about 38%. I suspect some of these hold ratings come from companies that may have a business relationship with Lumen or want to keep the option open.
Lumen also has a high debt of almost $20 billion. While the company is attempting a turnaround, given the stock’s high circulation and questions surrounding its role in AI, I would also avoid the stock until the company provides more evidence of sales related to AI.
Computer server and storage maker Super Micro Computer is the most shorted stock in the S&P500 (as of October 21), with more than 21% of the company’s outstanding shares sold short. The company has also benefited greatly from AI as investors believe its products can be used as key infrastructure for storing data that powers AI and machine learning. The stock has fallen in value by 68% this year.
In late August, Hindenberg Research released a brief report suggesting evidence of accounting malfeasance. The Securities and Exchange Commission charged Super Micro Computer in 2018 with accounting violations for improper revenue recognition and understatement of expenses. Now Hindenberg claims that management and other employees have returned to improper accounting practices. The report says three senior employees who left during the scandal have been rehired.
According to TipRanks, three Wall Street analysts tell investors to buy the stock, 10 recommend holding it and one suggests selling the stock. However, the average price target among them is $64, which suggests an upside of 34% from the current share price.
Supermicro has postponed the filing of its latest annual report. However, CEO Charles Liang said in a filing that the company does not expect any material changes in its financial situation based on the work done to date. Liang also noted that the company has set up a committee to review its internal controls and that he would address the claims made in the short report “in due course.”
These types of cases are risky because general investors will have difficulty obtaining or analyzing the information needed to make a decision. While the company has potential, I wouldn’t recommend taking a significant position here until more is known, especially given past violations.
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Super Micro Computer vs. Lumen Technologies: Wall Street says to sell one of these AI stocks and hold the other was originally published by The Motley Fool
