Hindenburg hits Super Micro

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Hindenburg Research, the activist short seller founded by Nate Anderson, is going after the archetypal stock of AI mania.

While Nvidia is well established as generative AI’s bellwether, signs of a bubble are more obvious in Super Micro Computer. Its rapid transformation from hardware reseller to hype beast involved a near-300 per cent share price gain in the first quarter of 2024. It became America’s biggest-ever smallcap, accounting for a record-breaking 2 per cent by weight of the Russell 2000 index.

The breakneck growth means that, unlike most $35bn-plus market cap companies, there’s questionable stuff in Super Micro’s fairly recent history.

Hindenburg recounts Super Micro’s various regulatory failures and the penalty it paid the SEC in 2020 over what the regulator called “widespread accounting violations”. It also draws attention to kit purchases from companies owned by the family of CEO Charles Liang.

What the short-seller adds is a catalogue of ways Super Micro may not have changed as much as investors want to believe. Not even the cast has changed, it alleges:

Less than 3 months after paying a $17.5 million SEC settlement, Super Micro began re-hiring top executives that were directly involved in the accounting scandal, per litigation records and interviews with former employees.

A former salesperson told us: “Almost all of them are back. Almost all of the people that were let go that were the cause of this malfeasance.”

Related party transactions “seem oddly circular” and “serve as fertile ground for dubious accounting,” the report alleges. One of the many paper trails it presents is towards Taiwanese suppliers allegedly owned by the CEO’s brothers.

After that there’s a chapter on why Super Micro’s proprietary innovations are neither proprietary nor innovative, followed by some questions about whether Russian and Chinese export sanctions have been circumvented.

Another thread involves Super Micro’s apparent struggles to win and retain big accounts, which for investors will be a familiar grumble. Hindenburg runs with the theme by piecing together reports of switching by big names in AI and cloud computing with interviews suggesting Super Micro installations caused all sorts of problems.

As we’ve come to expect from Hindenburg, it’s a comprehensive bit of work that runs to nearly 19,000 words. And like most of Hindenburg’s research, it builds out publicly known events with allegations based on nonpublic information that read like they have been lawyered half to death:

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.

The timing here is interesting. Nvidia reports second-quarter results tomorrow after the bell. It has been largely unaffected by a drab US earnings season and a growing cynicism around payback from big-tech AI investments. Even after the recent top-slicing by hedge funds, Nvidia shares are less than 5 per cent below their record high, having rallied nearly 30 per cent from an early August low.

Super Micro’s results on 6 August showed slowing revenue growth and profitability remaining under pressure, with any margin improvement pushed out to next year as it struggles to scale up manufacturing processes. The stock lurched lower at today’s open but soon recovered to trade little changed, having already halved from a record high in March:

Another thing we know about Hindenburg is that it’s a small fund that’s backed by much larger funds. Anderson said last month that it made just $4mn from its blockbuster short of Gautam Adani’s group of companies, having sold the idea to the US hedge fund Kingdon Capital Management in exchange for a share of profits. (The Indian markets regulator is investigating that arrangement.)

There are plenty of money managers who are cautious about AI, but only the bravest would short Nvidia a day before results. Betting against Super Micro may be a lower-risk way to play the same theme, irrespective of whether the specific new allegations against the company stack up.

Hindenburg’s full report is on its website. We’ve asked Super Micro to comment on the allegations and will update the post when we hear back.

Further reading:
— Welcome to Super Micro galaxy (FTAV)