Why Super Micro is a Buy After the Hindenburg Report (NASDAQ:SMCI)

The shares of Super Micro Computer (NASDAQ:SMCI) collapsed last week after a short seller published a report accusing the IT hardware company of accounting manipulation and related party transactions. In response, Super Micro Computer delayed its annual filing report that made matters worse last week: The company’s share price plunged nearly 30% since the allegations, sending investors on an emotional rollercoaster ride. I think the stock sale went too far here, and I think the company is fundamentally in good financial shape. While weak margins are a concern, Super Micro Computer has seen multi-year growth in key financial metrics, including revenue and operating income. With investors panicking last week, I think a new opportunity for engagement has been created.

Previous assessment

I took a look at Super Micro Computer for the server manufacturer reported fourth-quarter results and upgraded the stock to Buy, primarily on valuation grounds: Now a Deal (Rating Upgrade). Previously, that of the company poor gross margins were a concern for me, which is why I stayed on the sidelines before the company’s Q4’24 report revealed rising top-line growth.

A short broadside report on the company compiled by Hindenburg Research caused a major stock slide for SMCI last week, which I think makes the company much more interesting as a return investment. All things considered, I think the risk profile has improved and I’m taking another speculative buy position here.

Charges and Sales of Shares

Hindenburg Research, famous for issuing short reports, last week alleged that Super Micro Computer was engaging in poor accounting practices and questioned the strength of SMCI’s business model. The company also cited the company’s past filing delays (known), poor margin trend (known), and Hindenburg Research flagged $983 million in suspicious related party transactions.

As a result, Super Micro Computer said it was delaying its 10-K filing, which in turn added pressure on the company’s stock price. Super Micro Computer said it was reevaluating its internal controls, and the server maker has since said:

Based on work performed to date, the Company does not anticipate that the 2024 Form 10-K will contain material changes to its results for the fiscal year and quarter ended June 30, 2024, which were announced in the Company’s press release dated August 6, 2024.

While the ball is now clearly in SMCI’s court, I think investors may have been a bit distracted by the Hindenburg Research report. What is true about Super Micro Computer is that its business is in fundamental growth and all major key metrics have been pointing up for years… thanks to the company’s strong position in the server market. Super Micro Computer’s revenue, for example, has grown 414% over the past three years as companies invest in IT transformations and AI capabilities. In Q4’24, revenues were up 143% year-over-year.

This growth is supported by real demand for the company’s servers and storage systems. What’s more, the company’s growth story makes a lot of sense in the context of rising AI spending, which is forcing large enterprise customers to pour billions of dollars into the latest AI products in an attempt to stay competitive.

Furthermore, Super Micro Computer recently received a large order of Nvidia (NVDA) Blackwell server racks, with SMCI set to deliver a large portion (25%) of the GB200-based Nvidia AI Blackwell servers. This order attests to the strength of the company’s business trends and supports Super Micro Computer’s revenue trajectory.

While Hindenburg Research also mentioned SMCI’s weak margins in its August report, it was widely known that Super Micro Computer had low gross margins as a result of higher component costs. I mentioned this in my May paper and I don’t think the margin trend fundamentally changes the investment thesis here.

The SMCI rating now reflects a high margin of safety

The main reason why Super Micro Computer is a buy right now, in my opinion, is that the company has proactively reacted to the Hindenburg Research allegations and is reviewing its internal controls. This is the correct course of action and indicates that management is willing to move past the issues raised.

Last week’s 30% selloff made Super Micro Computer’s stock much more attractively valued. Shares of the AI ​​server maker currently trade at a forward price-to-earnings ratio of 9.8X based on fiscal 2026 (SMCI’s next fiscal year), compared to a P/E ratio of 15.0X when we last covered . SMCI in early August.

AI hardware makers have seen a massive increase in their valuations over the past year, in particular, but that growth has been supported by strong increases in revenue and earnings.

In my opinion, the massive valuation decline for Super Micro Computer is driven primarily by fear and is not supported by any major change in the company’s fundamentals. Compared to Super Micro Computer’s valuation last week, investors can get a solid 33% price-to-earnings discount.

In my last piece, I mentioned that I saw a P/E ratio of 25X as realistic given the momentum in SMCI’s business. However, out of caution, I want to lower my fair value P/E ratio to ~15X, as the Hindenburg Research report has created significant negative sentiment, which in turn causes upside risks to EPS estimates. A fair value P/E of 15X works out to a fair value of $669 per share, implying a 53% upside potential.

Risk profile

The biggest risk for Super Micro Computer, obviously, is if the company were to announce a major restatement of previous financials (which is unlikely given last week’s SMCI filing/statement, in my opinion). The spread of negative sentiment is also a real problem and can suppress the company’s share price for a longer period of time. What would change my opinion of Super Micro Computer is if the hardware manufacturer disclosed major accounting irregularities. Investors should also keep in mind that Hindenburg Research has a short position in SMCI and thus benefits financially when SMCI stock declines.

Closing thoughts

Buy when there’s blood in the street: Shares of Super Micro Computer have been pushed through the roof over the past couple of days, mostly due to a sharp shift in investor sentiment. Super Micro Computer suffered a nearly 30% price drop last week as investors overreacted to the Hindenburg Research report. Although SMCI must now answer and review its internal controls, the company has already said it doesn’t expect a restatement of the financials … which should ultimately work to Super Micro Computer’s advantage. Given the positive trends in the server/data center markets over the past 1-2 years, I see the downgrade as a potential buying opportunity for investors with a high risk tolerance.