Not Super By Super Micro

This is the first blip in quite a while for the chip sector.

It has almost been perfect in the latest leg up in the tech market carried by heavy hitter Nvidia (NVDA).

I don’t think this will have a significant knock-on effect on the prospects of NVDA.

NVDA is an animal of its own and I do believe we will see great earnings and positive forward guidance that could mean the next gasp up in tech stocks. 

Today represents the first black eye for the AI generative movement when short seller Hindenburg research accused Super Micro Computer (SMCI) of “account manipulation.”

There was a three-month investigation and many former insiders were contacted.

Hindenburg research has a pretty good track record calling out tech frauds.

Most of their calls focus on public stocks helmed by predominately Chinese nationals.

SMCI stock crashed 25% on the day, and it is an ominous setup going into Nvidia earnings later today.

Hindenburg said it reviewed various instances that suggested there were ongoing bookkeeping issues within the $35 billion tech firm even after the SEC charged it with "widespread accounting violations" in 2020.

Workers within the company said they faced pressure to meet high sales quotas, even after the company was charged by regulators.

The high quotas incentivized some workers to ship defective products.

Some of Super Micro's partners appeared to do little business outside their relationship with Super Micro. Ablecom, one such partner, exported 99.8% of its product in the US to Super Micro, while Compuware, another partner, exported 99.7% of its product to Super Micro.

Hindenburg also said Super Micro also ramped up exports to Russia after Moscow invaded Ukraine, which violated US sanctions.

Hindenburg highlighted quality concerns among Super Micro's customers, some of whom have turned to alternative suppliers. Tesla and CoreWeave, two of Super Micro's major customers, have inked high-profile deals with Dell over the past year because they found SMCIs products inferior.

The tsunami of bad news for SMCI means it is time to avoid the stock.

The company faces a torrent of accounting, governance, and compliance issues and offers an inferior product and service now being eroded away by more impactful competition.

The accusations are quite structural and investors won’t be able to just turn a blind eye to all of this.

SMCI delayed reporting their earnings at the last second which tells an investor audience that much of the accusation has some truth to it.

There is a lot to solve internally and I don’t think investors should swoop in and buy the dip just yet.

If there is a bounce, it most likely will be a dead cat bounce.

Although not an existential problem, this short seller report will set back SMCI 5 years and that is a long time in the world of tech.

Readers should avoid this chip stock and head to higher ground.

There is a possibility that this is just the tip of the iceberg and the core could find out to be a lot more rotten than first thought.

Readers will be better off sticking with the likes of Nvidia, Broadcom, AMD, and Micron.