How Concerned Should Super Micro Computer Investors Be About Hindenburg’s Short Report?

Super Micro Computer (SMCI -4.14%)also known as Supermicro, is in a pinch. Hindenburg Research recently released a short seller report on the tech company, alleging that it is once again involved in manipulating its numbers. That sent investors into panic mode. Supermicro shares have fallen more than 30% in the past month.

Investors were already starting to get worried that artificial intelligence (AI) stocks like Supermicro were getting too expensive, and now there are concerns about the business overall, including its internal controls and how legitimate its numbers are. Does this short seller report raise signals about Supermicro that should keep you away from the stock, or could its reduced price simply make now a good time to take a contrarian position in the company?

Hindenburg claims accounting manipulation

According to the Hindenburg report, after interviewing former employees and industry experts and reviewing documents, the research firm believes there are “glaring accounting red flags” that suggest revenue may be overstated and that internal controls may not have been respected. Hindenburg says people involved in an accounting problem that happened years ago are still involved in the business today.

In 2020, the Securities and Exchange Commission (SEC) accused Supermicro and then CFO Howard Hideshima of understating expenses and over-aggressively recognizing revenue from fiscal years 2015-2017. The fine was 17.5 million dollars. And in 2018, the action was also suspended for failing to file its financial statements on time.

What should investors say about the report?

Short seller reports are often biased and may contain incomplete and one-sided information. A few things about this one stand out to me.

To begin with, the former employees interviewed for the report appear to be primarily sales representatives and executives who would likely be unfamiliar with accounting policies and controls. And in any business, there will always be pressure to push through as much as possible at the end of the quarter to help meet the goals the report advocates.

Supermicro’s current CFO, David Weigand, took over the role in 2021 and has only been with the company since 2018, having previously worked at Hewlett Packard Enterprise. The CFO is the company’s most important accounting role, and Supermicro changed that position because it had problems with the SEC.

The Hindenburg report seeks to suggest that Weigand has weaker oversight and internal controls than predecessor Kevin Bauer, who left the company after helping it reinvent itself and fix its financial problems. But that is speculative at best. With a different CFO at the helm, there is no reason to suggest that the company is applying the same accounting practices and policies that previously raised concerns.

As with any short seller report, investors should not give it too much weight or allow it to influence their decision making without solid evidence.

Supermicro’s business has been booming, and demand for servers and AI infrastructure is skyrocketing. The company is coming off a strong fiscal year for the period ending June 30, in which net sales of $14.9 billion more than doubled from the prior-year amount of $7.1 billion. Net income of $1.2 billion was up significantly from $640 million a year ago. With such solid numbers and demand for its products, Supermicro doesn’t strike me as a business that needs a lot of late-quarter or year-end help to grow its numbers.

Should you buy Supermicro stock?

A short seller report can be scary, but investors should take it with a grain of salt. The information could come from disgruntled former employees or those unfamiliar with the issues at hand. There’s nothing in Hindenburg’s short seller report that leads me to believe that the Supermicro business is in serious trouble, as it seems to largely relate to the problems the company ran into before its new CFO took over.

This could be a good time for investors to take advantage of the potentially irrational fear surrounding Supermicro stock. At a price that’s 13 times forward earnings (based on analyst estimates), the tech stock could turn out to be a steal.