SMCI update
SMCI has been down 35% since my last article. What’s going on? Recently, Hindenburg https://hindenburgresearch.com/smci/ issued a short report on Super Micro, casting doubt on the company. Adding to the concerns, SMCI delayed its 10-K filing, leading some to wonder about potential accounting manipulation. However, CEO Charles Liang reassured investors, stating that no significant changes in FY 2024 financial results are expected. https://www.supermicro.com/es/news/supermicro-business-update-9-3-24He also addressed the short-seller claims, noting they contain false and misleading information aimed at driving down the stock price.
My Take:
Charles Liang, with 11% ownership in SMCI, has most of his wealth tied to the company, earning just $1 per year in salary. The short report points to $980 million paid to entities owned by his brothers, but this amounts to about $3 million per year—less than 0.1% of his wealth. It seems unlikely that he’d jeopardise his fortune over such small sums. Additionally, it’s common in Chinese business culture to work with trusted family members, which I believe explains the related transactions, rather than a money-grabbing scheme. As Charlie Munger wisely said, "Show me the incentive and I will show you the outcome." In this case, I don’t see sufficient incentive for wrongdoing.
Valuation:
Dell and HP typically achieve around 10% margins for their servers business, and I believe Supermicro can reach similar levels. If the short report’s claims of poor service or inferior products are valid, a more conservative 8% margin is possible. Even with a 10% revenue haircut from their guidance of $26-30 billion (down to $23-27 billion), the valuation remains attractive at today’s price.
Additionally, Super Micro's dominance in the market—owning 75% of the DLC liquid-cooled AI server market this year—adds strong growth potential, reinforcing the "heads I win, tails I don’t lose" scenario.
Disclosures: I am long SMCI
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