I think Super Micro Computer, (SMCI) should be avoided for the following reasons:
Restatements could alter the financials significantly: The odds are high that the company will end up restating past financials. The Auditor’s resignation, its CEO’s pay package, and its past settlement with the SEC in 2018 all suggest that SMCI will have to restate its financial statements.
No 10K: SMCI has delayed its annual 10-K filing and without an audited 10K, we have precious little faith in the numbers.
SMCI has priors: This was not their first time. In 2018, the company settled charges with the SEC for improper accounting. As stated in the article from the SEC website….
“According to the SEC’s orders, Super Micro executives, including CFO, Hideshima, pushed employees to maximize end-of-quarter revenue, yet failed to devise and maintain sufficient internal accounting controls to accurately record revenue. As a result, the orders find Super Micro improperly and prematurely recognized revenue, including recognizing revenue on goods sent to warehouses but not yet delivered to customers, shipping goods to customers prior to customer authorization, and shipping misassembled goods to customers. The orders also find that Super Micro misused its cooperative marketing program, which entitles customers to reimbursement for a portion of cooperative marketing costs. According to the orders, Super Micro improperly reduced the liabilities accrued for the program in order to avoid recognizing a variety of expenses unrelated to marketing, including for Christmas gifts and to store goods.”
Tainted: To me the alleged malfeasance creates significant doubts for investors that will not go away for a while, and it’s very likely that Wall Street will not touch it, fearing liability for not doing enough due diligence. Also, I can’t imagine SMCI getting a decent multiple in the future for the same reasons until faith is restored in management and its books.
Possible Loan Default: There is a significant risk of Super Micro defaulting on the company’s Term Loan Agreement with Bank of America.
Compensation tied to aggressive revenue targets: The CEO’s unusual compensation package, with virtually no base salary and bonuses tied to very aggressive revenue and share price targets, is a dangerous and potentially abusive practice.
Possible delisting from the Nasdaq, and getting thrown out of the S&P 500: The chances of both are high as a new auditor needs to be found, and a substantial amount of restatement work needs to be done.
A great business: Sure, SMCI has a great server liquid cooling business, which has tremendous potential and demand for server racks for AI GPUs, right now and for the foreseeable future. However, as we saw Nvidia has already started shifting this business.
Ignore the low valuation: I’m going to ignore the current low valuation of 8x earnings and 0.5x sales, which are much lower than competitors such as Dell (DELL) and Oracle (ORCL), simply because I have no idea what the restated financials will look like, and the valuation could be a lot different
The only way I would invest is the possibility of a merger/acquisition/White Knight, that will keep the stock afloat. The CEO owns close to 10% of the company so I doubt if he would let this go without a fight.
The other problem I foresee is the difficulty of getting good and timely information. For the most part, we rely on analysts who expect a proper set of books. Instead of focusing on the fundamentals, we’ll be spending far too much time, and worse without success trying to figure out what is genuine or not, It would make better sense to invest in other GPU/semiconductor businesses.
