At the start of this year, we wrote an article about SuperMicro titled “SuperMicro is a Shaky House of Cards?”
The title referred to a report written by note short-selling firm SprucePoint. As they wrote:
After conducting a forensic review of Super Micro Computer, Inc. (Nasdaq: SMCI or the Company) – a computer server and storage hardware manufacturer – Spruce Point has grave concerns about the accuracy of its financial reporting and sustainability of its recent stock price performance.
SMCI and its CEO have a troubling history that recently resulted in delinquent filings, financial restatements, and a delisting of its shares. In 2020, the SEC levied a massive $17.5 million fine and ordered the return of $2.1 million by the CEO for unjust stock sales in what the SEC described as “widespread accounting violations” tied to revenue and expense recognition.
We believe investors are chasing SMCI’s outlandish long-term revenue goals that ultimately won’t convert to cash flow while signs of financial troubles and new financial reporting pressures emerge. Our biggest concern is that SMCI has become reliant on Facebook (Meta Platforms), now a ~22% customer, which itself is struggling and is already reportedly suspending datacenter capital spending. Follow the money: SMCI’s founder and CEO has sold a record amount of stock in the recent months while the CFO sold 70% of his holdings.
We noted that SprucePoint was highly motivated to make SuperMicro look as bad as possible. They buy up the stock before their report, then blast their views all over social media and the press, hoping that the stock will plummet and they’ll reap rich rewards. There are a group of these firms which release these reports. In the main, they are like the accounting equivalent of the New York Post or a similar tabloid. The underlying facts are probably sound but they’re always written up in the most damning tone possible.
Which isn’t to say they’re wrong. A few of these short seller targets have crumbled when the spotlight is shone upon them. In other cases, the market reads the news and shrugs.
However, when the market saw SuperMicro’s earnings for 2024Q2, they didn’t shrug.
SuperMicro stock dropped 16% yesterday after they revealed they’d earned $6.25 a share and not the $8.25 analysts had been expecting. Sales were a rounding error under forecasts ($5.31bn vs. $5.32bn expected).
In other words, SuperMicro is selling fine, but they’re not making enough money. Instead of the 17-18% gross margin analysts expect, SuperMicro is only bringing in about 11%.
Executives said margins were negatively affected by the company’s business with a large cloud service provider and a higher mix of new liquid-cooled servers, which required investments in the supply chain. Large customers often are able to secure favorable pricing in return for big orders.
The stock is about half where it stood in March.
My guess is that commoditization is the core problem. What does SuperMicro make that HP, Dell, and a dozen others don’t? If I need an E5 with so much RAM, so much disk, etc. why would I pick SuperMicro over others? If the answer is price, SuperMicro has a real problem.
The firm is popular with many of our providers and we’re not rooting against them. Hopefully the first half of 2024 is just SM retooling for future profitability. Buy on the dip?
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I also enjoy using LEBs! I have an empire of little guys for VPNs, larger guys for apps, and big guys for databases and storage. When I'm not in front a screen I'm into German Shepherd dogs, quality knives, target shooting, theology, tabletop roleplaying games, and forest hiking.
I enjoy writing technical articles here on LowEndBox to help people get more out of their systems. You can find me on LowEndTalk @raindog308
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My cousin likes SuperMicro boards, servers, computers, etc. He tried to obtain two slightly customized SuperMicro EPYC servers (2023/2024), their tech support taken NEARLY ONE YEAR to resolve. My cousin thinks they put up their Adv on EPYC computers little earlier than EPYC computers were actually ready for sale. They put him (his business) in below (or nearly none) general level priority, or they are overloaded & too busy, or they are lazy. Hardware manufacturers/assemblers/suppliers can massup/destroy plans/projects.