To The Moon

$SUPER MICRO COMPUTER INC(SMCI)$ recently caught my attention when it announced that it's shipping over 100,000 AI GPUs per quarter. Shares surged 15% on the news, as investors rushed to take advantage of what seemed like a major win during the ongoing AI boom. With GPUs being essential for AI training and data centers, it's easy to see why Super Micro is being viewed as a key player in the AI infrastructure space. However, despite the surge, there are significant concerns beneath the surface that keep me from feeling confident in the long-term prospects of this stock.

Super Micro Computer SMCI

Let’s start with the elephant in the room: the allegations of accounting manipulation. Short-seller Hindenburg Research has accused Super Micro of "cooking the books" and potentially misleading investors about the volume of business they’re doing. This isn't something you can simply brush off as minor gossip. The fact that the Department of Justice (DOJ) is reportedly probing the company adds weight to these claims, and it makes me question how transparent Super Micro is being with its financials.

Then there’s the even more concerning issue of the delayed annual report. Super Micro is now over nine weeks behind in releasing its financials from the announced date, with the company citing issues in assessing their internal controls over financial reporting. Super Micro Computer's fiscal year ended on the 30th of June, 2024, and, as such, it was required to file an annual report by the 30th of August. A six-week delay in reporting financials, particularly for a company that’s already under scrutiny, is a massive red flag for me. It’s one thing to have the excitement of being a major player in the AI sector, but if I can’t trust the numbers, I can’t invest confidently, especially for the long term.

The company’s press release made it sound like Super Micro was benefiting hugely from the AI boom by shipping more than 100,000 GPUs per quarter. This initially sounds fantastic—until you dig a little deeper. Super Micro isn’t manufacturing these GPUs themselves; they’re shipping GPUs produced by companies like Nvidia. The profitability of shipping another company’s products hinges largely on gross margins, which are currently opaque due to the lack of financial disclosures.

There’s a big difference between being a middleman in the supply chain and being the creator of a high-margin, proprietary product. If the margins on these GPUs are thin, then 100,000 shipments might not translate into the massive profits that the headlines suggest. The lack of clarity around their actual gross margins and how much of this AI boom is truly benefiting the bottom line makes it difficult to assess whether Super Micro is actually thriving or just riding on buzz.

SMCI Daily Chart

From a technical perspective, however, there are some interesting signs that could suggest short-term bullish opportunities. The stock has touched the $38 range twice, forming what looks like a potential double bottom. In technical analysis, a double bottom can signal a reversal from a downtrend, with the price bouncing back strongly from that level. If Super Micro’s price can break out from its current consolidation range (around $37 to $48), there could be room for further upside.

I’m looking at a potential price target of $54 if the stock can break and hold above $48. The momentum following the news of increased GPU shipments might drive the price up in the short term. Personally, I’m considering a short-term trade here, but with very tight risk management, because there’s a lot of volatility around the stock.

Despite the possible short-term gains, I remain highly skeptical about the long-term prospects of Super Micro. The delayed financials, DOJ investigation, and accounting concerns create a risk profile that is far too high for my long-term portfolio. Even though the AI sector is red hot and Super Micro is in a prime position to benefit, these unresolved issues make it hard for me to trust the company’s future performance.

The lack of transparency in its reporting, combined with the potential for regulatory fallout from the DOJ investigation, makes this a stock I’d avoid for any long-term holdings. Sure, there’s always the chance that the company could be exonerated and the financials might come out strong, but I’m not willing to take that gamble.

In the short term, Super Micro might have bottomed out around the $38 range, offering a potential bounce to $54 if the price can break through resistance. However, as an investor looking for reliable, long-term growth, I can’t overlook the risks surrounding the delayed financial reports and the DOJ investigation into their accounting practices. While the AI hype is real, and Super Micro is well-positioned to benefit from it, the opacity of their current margins and financial health keeps me from feeling comfortable with a long-term investment.

So, while I may consider a short-term bullish trade, the long-term risks outweigh the potential rewards for me. It’s a stock that may attract traders, but for long-term investors, the question remains: can you trust the numbers? Until that’s clearer, I’m sitting on the sidelines.

What are your thoughts on SMCI? Would you be willing to take on the long-term risk, or are you also eyeing short-term trades only like me?

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Disclaimer: This is a general analysis and not financial advice. Always conduct your own research before making any investment decisions.