SMCI Stock (2024): Is Super Micro Computer Worth a "Gamble Investment"?

If nothing major is found in BDO's audit, SMCI's stock may skyrocket 2-5x

SMCI (Super Micro Computer Inc.) is a specialized server company that has been all over financial news for the past ~4 years (don’t confuse it with SMIC – the Chinese chip maker).

As a byproduct of insane AI server demand and SMCI’s dominant position in the AI server market (including partnerships with Nvidia) – its stock was one of the highest ROI investments from 2020-2024.

SMCI’s stock price exploded from under $3 at the start of 2020 to nearly $120 in 2024, with its market cap growing from ~$1.5B to over $62B (over 4000% ROI).

Everyone was drinking the SMCI hype juice… future’s-so-bright-gotta-wear-shades-vibes  through Q1 2024, but negative news began percolating in Q2-Q3.

Negative news included:

1. A whistleblower lawsuit (April 2024)

2. Hindenburg Research alleging accounting manipulation (Aug 2024)

3. Delaying its annual SEC 10-K filing (Aug 2024)

4. U.S. DOJ probing Super Micro Computer (Sept 2024)

5. Ernst & Young (EY) dropping SMCI as a client (Oct 2024)

6. Talks of potential SMCI delisting from the S&P 500 and Nasdaq (Oct-Nov 2024)

Predictably, the snowball effect of negative news about SMCI’s alleged accounting fraud led the company’s stock value to nosedive under $20 (when it was nearly $120 just months ago) – with extremely high short seller interest (~16.23% of total shares & ~21.29% of publicly available float).

Some even joked about whether they should change their name to just “Micro Computer Inc.” because they were no longer “Super.”

Anyways, SMCI was required to find a new auditor (it found BDO) and extended its deadline to file its 10-K with the SEC (December 31, 2024) as part of an amended loan agreement with Cathay Bank.

This has led some (including myself) to contemplate whether SMCI might be worth a “gamble investment” (current price: $20-$30 with potential recovery price of: $60-$100 – could be a relatively easy 2-3x if pass audits).

SMCI’s Shady History of Violations (Timeline)

SMCI has a history of breaking rules and cooking books dating back to 2006.

1. 2006: Economic Sanction Violation

• Issue: Exporting goods to restricted regions in violation of U.S. sanctions.

• Penalty: $179,327 fine by the Office of Foreign Assets Control (OFAC).

• Details: Super Micro was penalized for violating economic sanctions early in its operations. Specific case details were limited but involved improper exports.

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2. 2014–2017: SEC Investigation into Widespread Accounting Violations

• Issue: Premature revenue recognition, understated expenses, and misuse of cooperative marketing funds.

• Details:

  • Revenue was improperly recognized for goods sent to warehouses or shipped before customer authorization.

  • Expenses, such as Christmas gifts and storage costs, were inappropriately allocated to cooperative marketing programs.

  • Former CFO Howard Hideshima knowingly signed misstated financial statements, bypassing internal controls.

• Resolution: Financial restatements were made, and internal controls were enhanced.

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3. 2018: Nasdaq Delisting

• Issue: Failure to file financial reports for fiscal year 2017.

• Details: The delisting stemmed from delays caused by investigations into accounting irregularities. Super Micro later relisted after filing corrected financial statements.

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4. 2018–2023: Familial Loan Raises Governance Concerns

• Issue: Charles Liang (CEO of Super Micro Computer) borrowed ~$12.9 million from his brother’s spouse Chien-Tsun Chang to repay margin loans (secured by SMCI stock) to 2 financial institutions after Nasdaq suspended SMCI stock.

• Details:

  • In October 2018, Charles Liang borrowed approximately $12.9 million from Chien-Tsun Chang to repay margin loans secured by Super Micro stock.

  • The loan was unsecured, had no maturity date, and featured variable interest rates starting at 0.8% per month, later reduced to 0.25% per month by March 2020.

  • By June 30, 2023, the outstanding balance, including interest, totaled $16 million.

  • Familial ties complicate the arrangement: Chien-Tsun Chang is married to Steve Liang, Charles Liang's brother and the CEO of Ablecom Technology, a major supplier to Super Micro.

  • Charles Liang and his wife, Sara Liu, also own shares in Ablecom (10.5% as of 2023).

• Impact:

  • The informal terms of the loan (e.g., no security or maturity date) and overlapping family and business relationships raised concerns about corporate governance and potential conflicts of interest.

  • Occurred during a period of significant challenges for Super Micro, including its NASDAQ delisting in 2018 due to financial reporting issues.

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5. 2020: SEC Settlement on Prior Violations

• Issue: Continuation of accounting violations identified between 2014–2017.

• Details: The SEC completed its investigation, confirming deficiencies in internal controls over financial reporting.

• Settlement:

  • Civil fine: $17.5 million imposed by the SEC.

  • CEO Clawback: Charles Liang reimbursed $2.1 million in stock profits under Sarbanes-Oxley clawback rules.

  • CFO fines: Former CFO Howard Hideshima paid $300,000 in disgorgement, $50,000 in fines, and a cease-and-desist order for his role in circumventing internal controls and signing misstated filings.

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6. 2024: Renewed Allegations & Investigations

Whistleblower Lawsuit (April 2024)

• Issue: Former employee alleged ongoing accounting manipulation and export control violations.

• Details: Premature revenue recognition and rehiring of individuals involved in prior infractions. Claims of unauthorized exports to sanctioned regions like Russia post-2022.

Hindenburg Research Report (August 2024)

• Issue: Allegations of accounting manipulation, undisclosed related-party transactions, and sanctions evasion.

• Details: Highlighted sales overstatements and related-party transactions involving entities linked to CEO Charles Liang's family. Exposed potential violations of U.S. export controls, including sales to Fiberhome, a Chinese state-owned entity on a U.S. watchlist.

• Impact: Stock price plunged over 20% in two days; broader market concerns triggered lawsuits and investigations.

Class Action Lawsuits (August–October 2024)

• Issue: Securities fraud allegations by shareholders.

• Details: Claims of overstated sales, understated expenses, and misleading financial disclosures. Lawsuits covering infractions from February 2021 to September 2024.

Ernst & Young Resignation (October 2024)

• Issue: Ernst & Young resigned as the company's auditor, citing an inability to rely on management’s representations.

• Impact: Triggered another 30% drop in stock price and raised investor concerns over governance.

DOJ Investigation (September 2024)

• Issue: Focus on accounting violations, export control breaches, and related-party transactions.

• Details: Triggered by whistleblower allegations and the Hindenburg report. Potential criminal liability pending findings.

Specific Violations Reported in SMCI’s Past

• Premature Revenue Recognition and Reporting: This refers to recording revenue before the company has completed the actual sale or delivery of goods/services, violating accounting standards.

• Premature Revenue Recognition Prior to Customer Delivery: Revenue is recorded before the product or service has been delivered to the customer, which misrepresents the company's financial health.

• Improper Recognition of Revenue Upon Shipment of Goods Without Customer Authorization: Recording revenue when goods are shipped without obtaining prior authorization or agreement from the customer.

• Improper Recognition of Revenue Upon Shipment to a Large Super Micro Customer (And the Parties’ Shipping Terms Required Revenue to Be Recognized Upon Delivery): Revenue was recorded at the time of shipment instead of delivery, contrary to the agreed shipping terms with the customer.

• Improper Recognition of Revenue Before Obtaining Customer Acceptance: Revenue was recognized before the customer formally accepted the product or service, which could lead to disputes or reversals.

• Improper Recognition of Revenue Upon Shipment of Goods That Were Incomplete or Misassembled: Revenue was recorded for goods shipped in a defective, incomplete, or misassembled state, even though they could not be used as intended by the customer.

• Improper Recognition of Revenue Upon Shipment to a Large Super Micro Distributor: Revenue was prematurely recognized when products were shipped to a distributor, possibly before meeting delivery or contractual requirements.

• Improper Recognition of Revenue While Holding Customers’ Bills of Lading: Revenue was recorded even though the company retained the shipping documents (bills of lading), suggesting the goods had not yet been delivered.

• Failure to Properly Account for Extended Warranties: The company failed to correctly allocate or defer revenue for extended warranties, which should be recognized over the warranty period.

• Misuse of Cooperative Marketing Funds: Marketing funds provided by partners or suppliers were misused, possibly recorded incorrectly or spent on unauthorized activities.

• Overvaluation of Inventory: The company inflated the value of inventory on its balance sheet, which could mislead stakeholders about the company's financial position.