Why SMCI Crashed 32% ?

In recent months, Super Micro Computer has been thrust into the spotlight—and not in a good way. Once a leading AI server giant riding high on the waves of technological advancements, Super Micro now finds itself embroiled in an accounting scandal that’s left investors questioning its future. Accused of repeated financial misconduct, delayed reporting, and potentially even sanction evasion, the allegations have triggered swift market reactions and an analyst downgrade. But are these claims as serious as they sound, or just a short-selling scare?

Background: A History of Accounting Woes

Super Micro has faced serious financial reporting issues in the past, to the point of delisting from Nasdaq in 2018. Back then, the company admitted its failure to submit annual reports for 2017 on time, leading to a prolonged absence from the market. After intensive remedial actions, including internal control improvements and management changes, Super Micro returned to Nasdaq in 2020, and investors hoped it had left those troubles behind.

However, the shadow of past misconduct appears to be haunting Super Micro again. Known short-seller Hindenburg Research has released an in-depth report claiming the company is back to old tricks, reengaging in financial manipulation and sanction-evading practices.

The Hindenburg Report: A Bombshell for Super Micro

Hindenburg Research, famous for its investigative digs into major companies (including electric vehicle firm Nikola and social media giant X, formerly Twitter), launched a report on August 27, accusing Super Micro of accounting fraud, insider trading, and sanction evasion.

According to Hindenburg, Super Micro not only manipulated its financials to boost revenues but also allegedly rehired executives previously dismissed over accounting issues. Additionally, the firm alleges that Super Micro ignored U.S. sanctions, indirectly allowing products to be routed to Russia.

The response was swift—Super Micro’s stock plunged 8% on the report's release before rebounding slightly as some investors questioned the freshness of Hindenburg’s evidence.

Analysts’ Response: JPMorgan Downgrades Super Micro

On top of Hindenburg’s claims, Super Micro also faced a downgrade from JPMorgan analyst Samik Chatterjee, who reduced the stock rating from "Overweight" to "Neutral." Chatterjee pointed to the delayed annual report as a significant risk factor, casting doubt on the transparency of the company's efforts to meet compliance standards.

As uncertainty brewed, Super Micro announced it could not submit its annual report for 2024 on time, citing a need for more time to assess internal control design and effectiveness. In the days following this news, the stock took a further nosedive, falling nearly 28% in early trading on August 28, with single-day market value losses exceeding $6 billion.

Repeat Offender or Overblown Scare?

Hindenburg’s scathing report is reminiscent of its past takedowns, most famously of the EV company Nikola, which saw its founder jailed for fraud after Hindenburg exposed fake claims. But is Super Micro really guilty of the same repeated violations?

A deeper dive into Hindenburg’s report reveals specific accusations, such as the premature recognition of revenue, misclassification of maintenance services as sales, and allowing faulty or partially finished products to be counted as completed sales. Hindenburg even claims that Super Micro has been pushing inventory onto channel partners to artificially meet revenue targets, only to have those goods returned weeks later.

The Russia Angle: A Serious Allegation

Perhaps the most critical aspect of Hindenburg's report is the claim that Super Micro indirectly allowed products to reach Russia, skirting around U.S. sanctions following Russia’s invasion of Ukraine. U.S. government restrictions have banned the export of thousands of American tech items to Russia since the conflict began, and Super Micro insists it has not “directly” shipped any products there.

However, Hindenburg’s analysis of customs data suggests otherwise. The report claims that from February 2022 to mid-2024, over $210 million worth of Super Micro products found their way to Russia via third-party trade intermediaries. Hindenburg’s evidence alleges that some of these intermediaries are on the U.S. government's watchlist or have known connections to sanctioned entities.

Where Does Super Micro Stand?

While Super Micro refutes the majority of Hindenburg’s accusations, stating that past financial issues were settled with the SEC in 2020, questions remain unanswered about its internal practices and indirect export of products to Russia. The company’s delayed annual report has intensified scrutiny, and for now, the market is left to watch and wait.

So, is this truly a repeat of past misconduct, or just an overblown scare from a well-known short-seller? The answer will likely become clearer once Super Micro’s annual report is filed, expected in mid-September. Until then, the scandal serves as a potent reminder of the lasting impact of financial misconduct and the importance of corporate governance.