Transcription
The super micro computer situation is insane. Earlier this year, SMCI was one of the only stocks to outperform Nvidia, rocketing up by 300% in a single quarter. But just 8 months later, it's collapsed by over 80% and is at risk of being delisted from the NASDAQ altogether.
So now there are really only two questions left to ask: Is this the end for SMCI stock, or is buying it a no-brainer at these prices? And since they're such close partners, what does all this mean for NVIDIA? Your time is valuable, so let's get right into it.
Look, Super Micro is one of NVIDIA's biggest partners. They've distributed and installed hundreds of thousands of NVIDIA's GPUs and server systems in some of the biggest data centers and AI supercomputers on the planet. SMCI CEO Charles Liang has shared many stages with Jensen Huang. I personally got to meet Mr. Yang back in March when I was at NVIDIA's GTC conference. He was really nice and humble, especially considering that was the same day that Super Micro joined the S&P 500 and his company was worth around $70 billion at the time.
Fast forward to today, and Super Micro has a market cap of around $12 billion, marking an 80% decline in 8 months and a 35% decline year-to-date. This could be a huge opportunity for investors because Super Micro Computer is the same company that it was 8 months ago, making SMCI stock look super cheap.
For example, at the time of this recording, SMCI has a price-to-earnings ratio of just nine. For reference, their industry's average PE ratio is 22, and based on their forecasted earnings growth and profit margins, Simply Wall Street estimates that Super Micro should actually be trading at a PE of 46—more than five times higher than its current multiple. Their price-to-sales ratio is 0.7, which means their market cap is around 30% lower than their revenue for this year alone.
As a result, virtually any financial model is going to make SMCI stock look dirt cheap at these prices. For example, Simply Wall Street's discounted cash flow model thinks that the fair value for SMCI stock is over $330 per share, which would mean that it's trading at a 94% discount today. I know that it's tempting to run out and buy any stock at that kind of price, but every smart investor who sees numbers like these should only be doing two things: raising your eyebrow and asking, “What the heck is going on?” That's the $60 billion question, and to answer it, we need to break things down into four parts:
1. What caused Super Micro's meteoric rise in the first place?
2. What's been causing their collapse over the last 8 months?
3. Their current situation and the risks to shareholders that could come along with it.
4. What this all could mean for NVIDIA, which is one of their biggest partners.
You should also be aware that this is a developing story, so if you're watching this video long after it was published, you should probably find additional updates for yourself. With that said, let's talk about Super Micro's meteoric rise.
Earlier this year, although it seemed like an overnight success, SMCI is not a new company. Super Micro was founded in Silicon Valley in 1993, the same year as NVIDIA. In fact, SMCI and NVIDIA's headquarters in San Jose are only about 6 miles apart. Today, Super Micro offers everything from full-scale server and storage systems down to individual workstations and networking devices for a wide variety of different markets, including cloud services, AI training, and inference.
But it's important to understand that SMCI does not make their own chips. Instead, they take chips from companies like NVIDIA, AMD, and Intel and integrate them into their own data center infrastructure, adding power electronics, cooling, networking solutions, and software depending on the end customer and the application. A whopping 95% of Super Micro's revenue comes from the storage and server systems, and so every aspect of this company is designed to get them up and running for their customers as fast as possible.
From the way their products all work together to the corporate structure itself, this is Super Micro's biggest technical advantage: the science behind the stock. But, as I'll show you in a moment, it's also their biggest weakness.
The reason it's such a big advantage is a lower time to market for these systems means customers like Google, Microsoft, and Amazon can start earning returns on their massive infrastructure investments even faster, especially if they're getting the best chips up and running before their competition. To do that, Charles Liang and his hardware design team made SMCI solutions completely modular.
Super Micro calls these modules server building blocks. Some servers are air-cooled, while others require water cooling. Some customers might need more memory, while others want more storage. Of course, some data centers want more CPUs, while others are buying up as many GPUs as they can.
When a company like NVIDIA launches a new chip, Super Micro doesn't need to design a whole new server for it; just a new building block that already connects to the rest of SMCI's ecosystem. That means Super Micro can design, build, test, optimize, and deliver server solutions to customers in weeks instead of months and for much cheaper than most of their competitors. This again means a quicker time to market and a bigger return on hardware investments.
Let me drive the point home with a real example. Just a few months ago, Elon Musk set up 100,000 liquid-cooled NVIDIA H100 GPUs over at xAI. According to Jensen Huang, an AI supercluster of that scale should take around 4 years to set up—4 years! But Elon Musk did it in just 19 days, a whopping 75 times faster than Jensen thought possible.
The mind-blowing speed of standing up this supercluster was only possible because Elon Musk used Super Micro's liquid cooling modules for NVIDIA's H100 GPUs. Elon is also deploying Super Micro solutions at massive scales in supercomputers over at Tesla, which are used to train Tesla's AI for full self-driving.
That's the power of this building block approach to server infrastructure, and what I believe is ultimately responsible for SMCI's meteoric rise in early 2024. But when you're going that fast, it's easy to lose control, and that lack of control is Super Micro's biggest weakness.
Back in August of 2018, the SEC charged Super Micro with widespread accounting violations. The SEC found that Super Micro prematurely recognized over $200 million in revenue from 2015 to 2017. Specifically, Super Micro booked sales on products that were not yet delivered to customers. They also shipped goods to customers up to a month early in order to meet end-of-year sales goals.
In both cases, the accounting violations centered around Super Micro improperly recognizing real sales early to make their quarter-end and year-end numbers look better to investors, as opposed to faking those numbers altogether. As a result, Super Micro was temporarily delisted from the NASDAQ for a failure to file timely and accurate financial results.
In July of 2018, SMCI fixed this by adopting a new standard for revenue recognition, and they were relisted on the NASDAQ in January of 2020. Today, they're on the brink of being delisted once again. In August of this year, Hindenburg Research published a short report on Super Micro, alleging undisclosed transactions from related parties, sanctions and export control violations, and more accounting red flags.
Just one day later, Super Micro delayed filing the 10K for their 2024 fiscal year, which ended on June 30th. One month after that, the Wall Street Journal reported that SMCI was the subject of a probe by the Justice Department. One month after that, Ernst & Young resigned as their financial auditors, saying that they were “unwilling to be associated with the management's financial statements” and citing significant concerns over SMCI's internal controls, board independence, and accounting practices. Yikes!
What the heck was in Hindenburg's short report? I actually made a video going over it after it came out, which I'll leave a link to below. But there are three sets of allegations that matter right now.
But first, let me set the stage. Charles Liang has three brothers: Steve, Bill, and James, all of which run different companies in Taiwan. Steve is the CEO of a company called Aon Technology. Bill is the CEO of Compuware Technology, the director of AbleNet Technology, and the chairman of AbleNet Computer. James owns over 85% of two companies: Aon Lighting Technology and Aon Biotech. On top of that, Charles, Steve, and Bill are all big shareholders of at least one of their brother's companies.
On top of that, Steve and Bill have big stakes in another company called LeadTek. Although Hindenburg stops just short of saying that Super Micro has any undisclosed transactions directly with LeadTek, it kind of sounds like I'm setting you up for a brain teaser, but here's why all of these relationships matter.
The Hindenburg Research report alleges that Super Micro has been making undisclosed related party transactions with both Aon Lighting and Aon Biotech, both of which started as different companies doing things like lighting and biotech but pivoted to AI server design, research and development, and sales.
The SEC requires publicly traded companies to disclose all related party transactions to ensure that they're legal, don't have conflicts of interest, and don't compromise shareholder value. For example, if the Liang family undercharges Super Micro, then SMCI's profitability goes up and the stock price rises. Meanwhile, the assembly costs and other losses for SMCI can be hidden in the financials of the other brothers' companies.
Second, Super Micro appears to have rehired several key executives named in the lawsuits for the prior accounting issues that got them delisted in 2018. Wally Oal co-founded Super Micro in 1993 and served as the Senior VP of International Sales during their previous scandal. He resigned in 2018, but Super Micro rehired him in May 2021, and he rejoined the Board of Directors in 2023.
Sim Fidel was Super Micro's VP of Sales, and he left in 2018, but was rehired in 2020 as the VP of Business Development and Strategic Sales. Howard Heshima was the Chief Financial Officer of Super Micro until he left in 2018 as well, but he was rehired as a consultant for AbleCommerce.
As a result of rehiring people involved in previous financial scandals and being able to hide certain costs and transactions in companies owned by related parties, Hindenburg alleges that Super Micro is engaging in new undisclosed related party transactions, export control violations, and improperly recognizing revenue. If these allegations are true, they would all have a big impact on SMCI's revenue and profit margins.
A few days after the short report came out, Charles Liang issued a shareholder letter saying that the short report “contains false or inaccurate statements,” including misleading presentations of information that SMCI is still performing strong and that they don't anticipate any material changes to their financial results for the quarter or for the year when they do finally report their audited numbers.
On September 17th, Super Micro received a non-compliance letter from the NASDAQ, informing them that they have 60 days to file their 10K or submit a plan to regain compliance to remain listed on the stock exchange. If the plan is submitted and accepted, SMCI can be granted up to 180 days from the original due date to regain compliance. If the plan is rejected, SMCI can appeal the decision to a NASDAQ hearings panel.
That brings us to today, the day their plan is due. SMCI stock is currently up around 10% in pre-market trading after reports came out saying that they intend to file their plan today and remain listed on the NASDAQ. While that's definitely a step in the right direction, we still will have to see whether the NASDAQ accepts their plan and if not, whether SMCI will file and win any appeals.
Remember, this isn't the first time this happened, and I would think that the NASDAQ is taking repeat offenses into consideration. It's also worth noting that Super Micro held an unofficial earnings call earlier this month where they didn't provide any slides, and they reported unaudited numbers including revenue growth of 181% year-over-year.
While that's the kind of growth that shareholders love to see, revenue forecasts and earnings guidance for the next quarter both fell below analyst expectations. They also didn't address any questions about their 10K delay or any governance changes they plan on making as a result.
So the current situation is to wait and see whether the NASDAQ accepts or rejects their plan to stay compliant, whether Super Micro is willing and able to actually execute that plan, and what all of that means for their audited financials going forward. Those are the biggest immediate risks withholding SMCI stock while all of this unfolds, and that lack of information is also why I didn't cover their most recent business update when it happened. There was just nothing of value to report, and I wanted to respect your time.
Speaking of respecting your time, let's talk about what all of this means for NVIDIA, and if you feel I've earned it, consider hitting the like button and subscribing to the channel. That really helps me out and lets me know to make more content like this. Thanks!
With that out of the way, here's what the situation could mean for NVIDIA. SMCI is one of NVIDIA's largest distributors, accounting for 9% of their total sales. Remember, Elon Musk used Super Micro to deploy hundreds of thousands of NVIDIA's GPUs this year alone, and that's just Elon Musk.
That said, NVIDIA has been reinforcing their distribution and supply chains ever since wait times for their H100 GPUs reached almost a year long. That means they're doing everything they can to maximize production, minimize delivery times, and get as many data centers onto their hardware ecosystem while they still have a massive performance advantage over their competitors.
That's why it currently appears that NVIDIA is routing orders away from Super Micro and to their other partners, which also seems to be backed up by Charles Liang saying that they're asking NVIDIA for more chips every single day, which implies that they're not receiving enough NVIDIA chips to fulfill their backlog of orders.
So even if Super Micro does regain compliance and stays listed on the NASDAQ, which isn't guaranteed, this whole situation could further erode institutional confidence in holding SMCI stock. That means lower trading volume, less access to capital, and increased borrowing costs. On top of that, NVIDIA can keep rerouting orders until they're sure that Super Micro fixed all of their internal controls and won't cause any more supply chain headaches.
So although Super Micro Computer is a world-class server infrastructure company that can help deploy massive AI superclusters in a matter of days instead of years, they do have serious governance issues that come with real risks around this stock. As a result, I'm still waiting to see what happens, and I haven't been buying any more SMCI stock, even though it's trading at such steep discounts, just like I said in my previous video covering this crazy story as it continues to develop.
On the flip side, my guess is that this will impact NVIDIA's overall sales and earnings, and we may see some short-term pain since expectations for NVIDIA's performance are always so high. But even if NVIDIA stock does drop, my stance is the same today as it's been for the last 3 years: NVIDIA is the most powerful AI company on Earth, with the best management team on Earth, and the stock will perform accordingly over time.
NVIDIA's next earnings call is only a couple of days away, so stick around to see if I'm right or if I've just been getting lucky. If you want to know what other stocks I've been buying to get rich without getting lucky, check out this video next. Either way, thanks for watching, and until next time, this is Ticker Symbol U. My name is Alex, reminding you that the best investment you can make is in you.