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In the first quarter of 2024, high-flying Super Micro Computer (NASDAQ: SMCI) was one of the most popular artificial intelligence (AI) stocks to buy. Between mid-January and mid-March, its share price soared from around $300 to $1,230.
Recently however, this stock’s come crashing down. Currently, it can be snapped up for $440 – about 65% below its 52-week high.
Is it time to buy the growth stock for my portfolio? Let’s discuss.
I’ve been watching this stock
I’ve had Super Micro Computer on my watchlist for many years now (well before the AI craze). I actually wrote a bullish article on it back in 2017 when it had a market-cap of just $1.3bn (versus $26bn today). More recently, the stock came back into my focus last year when a director at the company bought $1.1m worth of shares.
I’ve always thought the company looks interesting from an investment perspective. That’s because it specialises in high-performance computer servers and storage systems that are environmentally friendly and save energy. And in today’s digital world, the market for these kinds of products is growing fast.
Meanwhile, Super Micro’s recent growth has been spectacular. Last financial year (ended 30 June), revenue more than doubled to $14.9bn. This financial year, analysts expect the top line to nearly double again to around $28bn.
It’s worth noting however, that the company has had some issues with regulatory authorities in the past. In 2018, for example, it was temporarily delisted from the Nasdaq for failing to file financial statements. Then, in 2020, it was charged by the US Securities and Exchange Commission (SEC) for ‘widespread accounting violations’.
Given these issues, I’ve never invested in the company.
Hindenburg short seller report
Now recently, the stock’s been hit by a short seller report from Hindenburg Research. In the report (released in August), Hindenburg has accused Super Micro of:
- Further accounting manipulation – Hindenburg believes Super Micro has been engaged in ‘improper revenue recognition’ and ‘circumvention of internal accounting controls’
- Questionable disclosed and undisclosed related-party transactions – the report mentions that businesses Ablecom and Compuware, which are controlled by Super Micro CEO Charles Liang’s brothers, have been paid $983m in the last three years
- Sanctions violations – the report notes that Super Micro has violated sanctions rules by exporting products to Russia
Hindenburg also mentions that key customers such as Tesla and Amazon have been moving away from Super Micro and doing business with competitors such as Dell.
All told, we believe Super Micro is a serial recidivist. It benefitted as an early mover but still faces significant accounting, governance and compliance issues and offers an inferior product and service now being eroded away by more credible competition.
Hindenburg Research
Should I buy?
Given the accusations in this report, I won’t be buying Super Micro Computer stock right now.
Short seller reports aren’t always accurate. But I’ve found over the years that where there’s smoke, there’s often fire. What concerns me is that this short interest right now is very high at nearly 20%. This suggests a lot of institutions are betting against the stock today.
Of course, there’s a chance that Super Micro shares could rebound from here. After all, the company is at the heart of the AI revolution, and uses Nvidia‘s graphics processing units (GPUs) for its servers.
Given the level of interest from short sellers, however, I’m going to look at other AI stocks for my portfolio.
