Super Micro Computer (NASDAQ: SMCI) has been one of the biggest winners of the AI boom so far. Revenue has taken off, reaching record levels, as customers rushed to order the company's latest servers and workstations for their data centers. This has helped the stock soar, even outperforming market star Nvidia in the first half of the year, and Supermicro win spots in the S&P 500 and the Nasdaq-100 this year.
But this success story recently hit a speed bump in the form of a short report from Hindenburg Research, with the firm alleging troubles at the equipment maker. Short-sellers have a financial incentive to drive down the price of the stock they are short, so you always have to keep that in mind when reading a "short report."
Supermicro shares have slid more than 20% since the report in late August, sending valuation tumbling, too. So right now, you may be wondering whether to avoid Supermicro or buy the dip.
The short report
First, let's consider Hindenburg Research's position. The firm was short Supermicro stock when it issued its report, meaning it would benefit from declines in the stock. In short-selling, a buyer borrows shares and sells them, with the idea that the price will drop -- then the short-seller will buy shares back at a lower price and return them to their owner, pocketing the difference between what they sold the shares for and what they paid to buy them back.
Since Hindenburg has a short position in Supermicro stock, it has a certain bias toward seeing the stock fall. That's something to keep in mind when considering the report. Hindenburg covers a lot of territory, with its allegations ranging from "undisclosed related party transactions" to "export control failures." The firm said it conducted a three-month investigation, which included interviews with several former Supermicro employees and reviews of litigation records and other documents.
And in poor timing for Supermicro, the Hindenburg report happened to be released the day before Supermicro's announcement that it would delay the filing of its annual 10-K report. The delay further shook investors' confidence in the company. On top of this, investors may be having a flashback to 2020, when Supermicro faced a charge of "improper accounting" and was fined $17.5 million.
Keeping eyes on the facts
Though this sort of news can easily make investors question a company, it's important to keep your eyes on the facts and what you know for sure right now. As mentioned, Hindenburg will benefit from any declines in Supermicro stock, so a bias exists there. And investors don't yet have clear facts from another source confirming the Hindenburg allegations.
Meanwhile, Supermicro released a letter to customers and partners saying the short report "contains false or inaccurate statements about our company including misleading presentations of information that we have previously shared publicly. We will address these statements in due course."
And, importantly, Supermicro also said, regarding the delayed 10-K, "we don't anticipate any material changes in our fourth quarter or fiscal year 2024 financial results."
Finally, it's key to remember that Supermicro's prior charge back in 2020 doesn't necessarily mean the company is having similar problems today. So, while investors should carefully watch this situation unfold, today there isn't a concrete reason to sell Supermicro stock.
A major AI player
But is the stock worth buying right now? Supermicro has proven itself a major player in the AI world over the past few years. Recent quarterly revenue -- coming in at $5.3 billion -- surpassed the company's annual revenue as recently as in 2022.
The one negative in the recent earnings report was gross margin, which fell to about 11% from 17% a year ago. But the company said this was due to temporary headwinds, such as efforts to ramp up direct liquid cooling production, and set a goal of 14% to 17%. And Supermicro has said the long-term goal is for a new Malaysia factory to help it increase volume at a lower cost. This should play an important role in the margin picture.
Despite the optimistic outlook, if you're a cautious investor, you may want to remain on the sidelines as the Hindenburg report story plays out and until Supermicro files its annual report, or if you're already a shareholder, you might want to sell and lock in some gains.
But, if you can handle some risk and don't mind near-term volatility, take a look at Supermicro's valuation of 12 times earnings estimates -- and consider scooping up a few shares. This looks like a dirt cheap price for a company that's delivered so much growth and should continue to see revenue soar as the AI boom continues.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
After the Hindenburg Report, Is Super Micro Computer Stock a Buy or a Sell? was originally published by The Motley Fool