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SuperMicro is a Shaky House of Cards?

SuperMicroOne of the big shorts on the street has released a new report on SuperMicro. Quoting from the intro:

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.

SprucePoint is a short seller and they are obviously motivated to see the stock tank.  They put out a slick report, replete with headline-catching words and punchy graphics, and blast it over social media, SeekingAlpha, and if they’re lucky, the mainstream press.  The stock swoons, they cash in, and they’re off to the next victim.

However, this doesn’t mean they make stuff up.  I once worked for a company that SprucePoint issued a report on. There were a couple things that they got wrong because they didn’t understand the industry but I’d say 90%+ of what they wrote was either accurate or plausible.  Much of it was not an accusation that anyone was breaking the law but rather asking questions of the “is this really a good idea” variety.

As a target, pressure on our company was immense.  My employer had to call off a $15bn+ acquisition, the SEC started circling overhead, and the stock was in the toilet for a couple years after.

After that experience I subscribed to their mailing list. Every few months you get a tease (“tomorrow we’re releasing a report on a CEO with Mafia connections whose deceptive inventory reporting reveals that the company’s sales are tanking” or something like that), and then the report is available the following day.

Another check on those who publish short reports is that while anyone can say “I think Apple stock will fall” or “I think Tesla is over-rated because of X, Y, and Z”, making up lies exposes the author to legal liability and corporations are certainly happy to sue those where they can

Of course, SprucePoint is only interested in SuperMicro from a financial rather than a technological viewpoint.  The picture they paint is not atypical: CEO wants that sweet tech multiple but needs to demonstrate hypergrowth to keep it.  So he courts larger customers (and takes on concentration risk), fuzzes some of the accounting items that are open to interpretation, and tries to hide any sales stalls with bloated inventory or one-time write-offs.  Worth noting that in 2020, SMCI was charged with “widespread accounting violations” (as the SEC put it).

Another callout from the report is how reliant SuperMicro is on Facebook.  As Facebook cuts costs, they’re likely going to spend less on SuperMicro servers.

Even if accounting is complete Greek to you (and you’re not Greek), the interview with a former executive (page 17) is fun.  And some of the questions of the top of the slides are well-posed.  I mean, why are two sets of inventory books being kept?


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