To The Moon

Daring to short an AI-related company in the current environment, especially one of $Nvidia (NVDA)$ 's key supply chains, Hindenburg was clearly well-prepared as well.

• On August 27th, when there was no news on the market, $ Super Micro Computer (SMCI)$ fell 8.27% against the trend, which is already very strange.It is difficult to convince investors with the reason of "about to split shares".

• August 28, the official release of the report, the truth is revealed, it seems to be Hindenburg or other institutions have advanced layout.However, the opening loss of about 5% and closing loss of 2.5% is not a "proud" achievement in Hindenburg's shorting history.

The shorting report discusses several issues that I think can be viewed on two levels:

1. Ethical issues, including accounting manipulation, connected transactions, and inflated revenues.

2. Valuation issues, mainly challenges in the core business, along with declining growth rates, which may bring about overvaluation.

My take.

• As a ticket that went from a double-digit to a four-digit share price , it's a bit out of place to talk to SMCI about ethics.Speculation in itself is not a very ethical thing to do, and things come in different packages anyway.

• At present the real danger, may make the "shorting" more successful, or valuation issues, whether there will be more investors in the trade "slowing revenue growth, increased competition" consequences?

The company's fiscal year ends at the end of June, and the latest reported sales growth for the current fiscal year 2024 is 109%, of which FQ4's nightcap as well as the beginning of the weaker than expected, especially the margins of this piece.

Fiscal year 2025 (starting in July 2024) Consensus growth rate to reach 87%, but these ancient early expectations do not help much, because it is exactly this is also NVDA whether there will be a "growth inflection point" of the important time.Two factors are also important

1. The impact of Blackwell's delay on SMCI may be just the beginning;

2. The company's claim to fill the Blackwell void with products such as the H200 is also likely to ignore the impact of competitors, such as $HPE$ $DELL$.

So at this point in time, being long is not cost effective.Because

• If the results are in line with expectations, or slightly exceeded some expectations, may be interpreted by the market as "AI demand is still strong", which is taken for granted, it is easy to "Sell the fact".

• If the performance is not as expected, or partially in line with, and partially less than expected (such as declining margins), there is a high probability of "from where to go back to where" retreating down.

The current valuation multiple is still one of the highest in the industry, so there is pressure to move up at this price, but more than enough to move down.Additionally, SCMI was included in the $S&P 500(.SPX)$ index at the height of the stock's price, but is also likely to be moved out due to its performance.

Here are the key points of the short-sale report as summarized by AI:

1. past allegations of accounting manipulation

• In 2018, SMCI was delisted from NASDAQ for failing to file financial statements for the second consecutive year.

• In August 2020, the U.S. Securities and Exchange Commission (SEC) charged SMCI with a wide range of accounting irregularities, including recognizing revenue in advance, recognizing revenue prior to shipment, and sending incomplete or improperly assembled merchandise to customers.The SEC alleges that SMCI unlawfully recognized more than $200 million in revenue in advance during the fiscal years 2015 through 2017.

2 Related party transactions and sanctions evasion

• Ablecom Technology, an affiliate of SMCI led by the brother of SMCI CEO Dagui Liang, engaged in hundreds of millions of dollars in transactions with SMCI each year.

• The report noted that SMCI rehired a number of employees associated with previous illegal accounting practices, including co-founder Wally Liaw, former vice president of sales Phidias Chou, and former vice president of sales Salim Fedel.

3. Continued improper revenue recognition

• In April 2024, Bob Luong, SMCI's former general manager of global services, filed a lawsuit alleging that the company continued to engage in false revenue recognition after its 2020 re-launch.

• The report cited former employees as saying that the sales team worked with resellers Avnet and Tech Data at the end of each quarter to overshoot to increase numbers in what looked like a form of channel stuffing.

• As an example, the report says that in June 2023, SMCI shipped unavailable pre-production servers to customer Genesis Cloud at the end of the fiscal year, and in March 2024, about 40 percent of the 1,000 GPU servers that SMCI shipped to customer Crusoe AI had GPU failures.

4. Other corporate governance issues

• The report suggests that SMCI CEO Tatsuya Leung's rehiring of employees linked to accounting scandals reflects his emphasis on loyalty rather than corporate governance.

• Former CFO Kevin Bauer, who left SMCI shortly after helping it re-list and settle SEC charges, may have been forced out, the report suggests.

• The report noted that SMCI's core product, servers, was facing stiff competition from tech giants such as Dell and Hewlett-Packard, and that gross margins were declining.