An AI-Darling Market Explodes | InvestorPlace

SMCI Collapses After Delaying Key Filing… How Did Nvidia’s Earnings Come In? … Berkshire Hathaway tops $1 trillion … how many years of “sucking” can you handle?

Today, Super Micro Computer, the darling of the AI ​​market (SMCI) exploded as fraud fears intensified.

As of this writing Wednesday afternoon, shares are down 25% after the company delayed filing its annual report with the Securities and Exchange Commission.

Usually, such a delay might raise some eyebrows, but it wouldn’t lead to such a violent market reaction. The difference this time is that the announcement comes just a day after short seller Hindenburg Research published a scathing attack on SMCI.

Behold Quartz with more:

(Hindenburg Research accused) Super Micro Computer of accounting red flags and questionable business dealings, including potential evasion of sanctions on exports to Russian and Chinese firms…

According to a report published on Tuesday, it found “glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures and customer issues”.

And this comes directly from Hindenburg’s report:

All in all, we think the Super Micro is a serial repeat offender.

It has benefited in its quality as an early adopter, but it still faces significant accounting, governance and compliance issues and offers an inferior product and service that is now being eroded by more credible competition.

This is not the first time Super Micro has had problems with SEC

In 2018, Nasdaq briefly delisted SMCI after the company failed to file required financial statements.

Regulators eventually charged SMCI with “widespread accounting violations” that included misreporting revenue. The penalty was a $17.5 million fine.

Hindenburg’s report cites this violation, then claims that SMCI’s business practices have not narrowed since then.

Back to report:

Even after the SEC grant, the pressure to meet quotas pushed salespeople to fill the channel with distributors using “partial deliveries” or by delivering defective products at the end of the quarter, according to our interviews with former employees and customers.

Returning to SMCI’s announcement that it was delaying its 10-K filing for fiscal 2024, management said additional time was needed “to complete the assessment of its internal controls over financial reporting.”

Now, while the optics here aren’t good, we don’t know if this delay is a red flag or not.

This morning on his Flash Alert podcast, legendary investor Louis Navellier noted that “(SMCI’s) CFO may want to make sure they don’t give Hindenburg credibility.” He then reminded his listeners that SMCI still has over 100 percent sales growth.

We’ll keep an eye on this and report back as new details emerge.

Meanwhile, the much more important report that should be out by the time you read this comes from Nvidia

Nvidia (NVDA) reports Q2 earnings after the closing bell today. Due to the publication deadline, I don’t know how the numbers were arrived at, but I do know that history suggests artifice.

Looking at NVDA’s price action following earnings over the last 12 quarters, we see that the chipmaker has moved about 8% on average.

Now, as you read this, you are in the funny position of comparing “what was predicted” with “what happened.”

On that note, Louis suggested yesterday that for this quarter’s earnings announcement, investors will be discounting less on NVDA’s bottom-line revenue and more on its forward-looking guidance.

From Louis:

Nvidia’s earnings will be more about guidance than anything else.

It will all be about how many Blackwell tokens they sell. They got a $10 billion order from Google, huge orders from Meta, Microsoft, server farms ie Super Micro etc…

Guidance at this point is more important than results.

So how did the guidance come about?

If the NVDA indicates robust demand that will lead to higher earnings forecasts, we will likely have a big “up” day in the market tomorrow.

But if NVDA disappoints, the market won’t take it well. After all, Nvidia has become the world’s top AI stock… and AI has become the world’s top investment trend for Wall Street.

At least for tomorrow, the odds are that “as Nvidia goes, so goes the market.”

Shifting gears, a big “congratulations” goes to investors Warren Buffett and Berkshire Hathaway

Earlier today, Berkshire became the first non-tech company to reach $1 trillion in market capitalization.

It joins Apple, Nvidia, Microsoft, Alphabet, Amazon and Meta in this elite club.

Now, to be fair, while Berkshire isn’t a tech company, we might consider it “tech-adjacent” because of its overweight position in Apple.

As of December, Apple accounted for 50% of Berkshire’s holdings. And even though Buffett sold a huge chunk of Apple this year, it’s still his largest holding, comprising about 30% of his portfolio. Beyond Apple, Buffett’s other tech holdings include Amazon and Verisign.

Its biggest holdings outside of Apple are Bank of America, American Express and Coca-Cola.

If you own Berkshire, congratulations, you’re up 28% year-to-date compared to the S&P’s 17% climb.

But if you’re a longtime owner of Berkshire Hathaway stock, you’re aware of a secret most investors don’t know…

Buffett’s long-term average return is 19.8% from 1965 to the present, compared to 9.9% for the S&P 500.

But hidden beneath this fantastical and shiny number is a reality that most investors don’t realize and even fewer could face…

In any given year, Buffett underperforms the market…by a lot.

My friend Meb Faber, co-founder and CIO of Cambria Investments, ran a funny piece a few years ago that highlights this reality.

He began by showing how impatient investors are who want to see big returns quickly. He asked his Twitter followers (now X) what poor performance of a portfolio manager they would be willing to tolerate before selling the allocation.

The majority answer?

0 – 3 years.

Source: @MebFaber

Now, with that in mind, let’s move on to Meb as he redirects to Buffett:

Many portfolio managers can go years or even more below their benchmark performance and still be viable allocations.

Let me give you an example that everyone can relate to.

An investor who put $10,000 into Berkshire Hathaway in 1965 would now have $200,000,000.

That means Two. A hundred. Million. dollars.

But most could never have endured the roller coaster ride to get there. It’s easy to fantasize about the $200,000,000 finish line…but think of the suffering of one of Berkshire’s. multiple 50% off…

Right now, you’re revisiting a past chapter in your life — say, saving for that down payment or opening up your child’s huge tuition bill or needing a new roof after finally checking the leak. You go to check your finances for the first time in a while, only to realize you’re down 50% because Berkshire tanked.

Would you have held on, having no idea if the losses would keep coming or not? However, knowing that the down payment, or the tuition, or the roof had to be paid?

Meb goes on to note that as of his 2020 article, Berkshire had underperformed the S&P in 11 of the previous 17 years. And if you look at that entire 17-year period, the S&P beat Buffett.

Would you stick with Buffett this time around?

Or would you be tempted to conclude that the old man has lost his edge?

In Meb’s view, consider watching your Buffett position underperform for, say, 15 years while your neighbor’s “hot stock” portfolio has soared.

On a similar note, it was Buffett’s business partner Charlie Munger who once quipped, “I’ve heard Warren say half a dozen times, ‘It’s not greed that rules the world, it’s envy.’

Now, despite this poor performance, Buffett has dominated for a longer period.

Back to Meb:

However, if you had invested in Berkshire at the turn of the century, (as of 2020) its picks would have outperformed the S&P 500 by three percentage points PER YEAR. (Top 10 stocks, weighted and rebalanced quarterly, via AlphaClone.)

In fact, its performance would have outperformed over 94% of all mutual funds over that period.

That’s what it takes to outperform over time. Long periods of sucking. (Technical phrase.)

This is a good reminder that if you own what you think is a great company that will remain a leader for decades to come, sticking with it despite years of “upset” is probably the best course of action.

Going back to the top Digestit will be interesting to see exactly how bad the “juice” is for the Super Micro in the coming days.

We will keep you updated.

Have a good evening,

Jeff Remsburg