Option Witch | What To Do With Super Micro Computer Shares

seekingalpha11-25

Super Micro Computers faces significant risks, including potential delisting, due to ongoing accounting irregularities and related-party transactions, as highlighted by Hindenburg Research and auditor...

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tjen
11-26
tjen

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nOption Witch | What To Do With Super Micro Computer Shares \n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-25 15:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739913-what-to-do-with-super-micro-computer-shares><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Super Micro Computers faces significant risks, including potential delisting, due to ongoing accounting irregularities and related-party transactions, as highlighted by Hindenburg Research and auditor...</p>\n\n<a href=\"https://seekingalpha.com/article/4739913-what-to-do-with-super-micro-computer-shares\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SMCI","symbol_name":"超微电脑","start_time":0,"source_url":"https://seekingalpha.com/article/4739913-what-to-do-with-super-micro-computer-shares","article_id":"2485791508","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485791508","pubTimestamp":1732521594,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"$Super Micro Computers(SMCI)$ faces significant risks, including potential delisting, due to ongoing accounting irregularities and related-party transactions, as highlighted by Hindenburg Research and","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SMCI":"超微电脑","BK4170":"电脑硬件、储存设备及电脑周边","LU1861215975.USD":"贝莱德新一代科技基金 A2","LU0053671581.USD":"摩根大通美国小盘成长股 A(dist)","BK4585":"ETF&股票定投概念","LU1861220033.SGD":"Blackrock Next Generation Technology A2 SGD-H","BK4588":"碎股"},"translate_title":"期权女巫如何处理超微计算机股票","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMCI":0.9},"content_text":"Super Micro Computers faces significant risks, including potential delisting, due to ongoing accounting irregularities and related-party transactions, as highlighted by Hindenburg Research and auditor resignation.The stock has experienced extreme volatility, plummeting 86.7% after a meteoric rise, driven by concerns over SEC and DOJ investigations.Various options strategies are suggested for traders, depending on their outlook, including call options for a potential recovery and put options for further declines.Friedrich Global Research avoids SMCI due to its overvaluation and accounting issues, focusing instead on long-term investments in consistently outperforming companies.It's ComplicatedThere are a lot of moving parts and to be determined events clogging the future for Super Micro Computers. But there are some ways to play the possible moves, depending on what you believe the outcome will be. I will outline those at the end of this article. First, we need to understand what is going on so we fully grasp the risks involved and why there are so many potential outcomes.HistorySMCI paid a fine of $17.5 million in 2020, admitting no wrongdoing, to SEC. The SEC investigation into SMCI alleged accounting and reporting violations led to a delisting of the shares in 2018. The investigation and resulting fine were mainly related to $200+ million in improperly recognized revenue and understated expenses, resulting in artificially elevated sales, earnings and profit margins.Hindenburg Research released a report accusing SMCI of similar problems on August 27, 2024. The report refers to past problems and claims that many of the executives who were fired because of the earlier SEC investigation were rehired and that many of the problems that were evident during the period prior to that incident, such as related-party transactions and improper recognition of revenues, continue at the company. The report is very damning, but it was published by a short seller, so we need to take the claims with a grain of salt. If true, however, another delisting is not out of the question.Early in 2023, the stock traded around $70/share ($7 after the split). By early 2024, the stock reached a high of $1,299 before splitting 10 for 1 to $129.90. So, looking at it from a split adjusted basis, the stock rose almost 13,000% in one year, or 13 times.Once the Hindenburg Research report hit, the stock began to tumble. Then the auditor resigned, and the bottom continued to fall out. The stock closed at $18.01, hitting an intraday low of $17.25. From the top to the bottom, it fell 86.7%.Delisting RiskThe risk of delisting caused panic selling because institutional investors and fund managers would need to sell if the stock were to be delisted, since most of their charters require that they invest only in exchange-traded stocks. To make matters worse, many foreign investors have difficulty trading over the counter U.S. stocks because their local brokers cannot facilitate the transactions, or if they can, it comes at a much higher cost. Thus, if delisted, the majority of shares outstanding would change hands.It appears that many of those investors decided to jump ship ahead of the final ruling.SMCI did submit a plan to NASDAQ which, if approved, would extend the deadline for the company to file its fiscal 2024 10K and its Q1 10Q reports with the SEC. Many investors assumed that the filing would automatically lead to the company remaining listed. There is a caveat to consider: NASDAQ review could take anywhere from two to five weeks, and it may not approve the plan due to this being a recurring occurrence of similar irregular practices.There are also rumors of a probe by the Department of Justice. According to the Wall Street Journal and Reuters, the investigation is more than a rumor. It began about a month after Hindenburg Research published its report. If the DOJ finds wrongdoing, it could also lead to delisting and restatement of past financial results. So, even if the filing extension is granted by NASDAQ, delisting will still not be off the table, even if the stock trades as though it is.Related-Party TransactionsAccording to the Hindenburg report, the fundamental accounting problem revolves around related-party transactions and payments between SMCI, and entities owned by the CEO's brothers. Hindenburg Research shorted the stock and reported anomalies involving circular transactions between the companies that did not produce any economic benefit, suggesting that such transactions inflated revenue and potentially misrepresented expenses.This sort of thing got IBM (IBM) into trouble a long time ago, when the company was reporting revenue on units shipped to distributors on consignment without having a sale yet to record. We all know what happened next. IBM went from being a big dog to being irrelevant for a while.According to the report, SMCI salespeople would record a partial sale upon shipping the initial portion of a sale, overstating the actual value of the product sold. This causes an accounting problem, especially when the rest of the shipment was never actually sold or delivered.There is a lot more in the report, but I will let those who want to wade into the details click on the link provided earlier to view it in full.Auditor ResignsAuditor, EY, resigned as it stated that it could no longer rely on representations made by management or its board members and is unwilling to be associated with the financial statements prepared by management. A very serious problem must exist for an accounting firm to make such a strong statement and walk away from a client.SMCI has since reported the engagement of BDO, a second-tier global accounting firm, to complete the audit function for fiscal 2024 and Q1 of fiscal 2025. BDO may not be one of the Big Four accounting firms, but it still has a reputation to maintain and is a highly respected accounting firm. If restating the financial results from prior periods is necessary to satisfy BDO auditing staff, management will either need to comply or accept a delisting. Once again, the delisting problem is still not fully resolved.Other ProblemsNvidia has moved orders from SMCI to other vendors in order to maintain stability in its supply chain. This will affect SMCI revenue going forward. Whether the company can resolve its problems, remain listed, and repair all relationships with both suppliers and customers will be the real determining factor for future SMCI valuation.At this juncture, there are just too many outstanding issues that need to be reconciled before we can project the future for SMCI. We cannot recommend the stock with the current cloud of accounting improprieties overhanging it, however, the business model and potential growth due to the build out of AI infrastructure are sound. The company just needs to get its accounting straightened out, put a stop to the activities with the CEO's relatives, restate its financial results according to GAAP and deal with the DOJ.Probably the best thing the company could do at this point is fire its CEO (and maybe the CFO, as well) and find a replacement(s) who is respected in the industry with strong standing from experience with the SEC and accounting/auditing industry. However, I doubt that the CEO would leave as SMCI, though publicly traded, is essentially a family-run business. The CEO ties run too deep.How We Avoided the MessSubscribers to Friedrich Global Research would have avoided this mess because, as our quantitative chart shows, SMCI was highly overvalued until recently.Friedrich Global ResearchThe chart above only offers year-end and TTM (trailing 12 months) pricing. At current prices, the stock appears to be fairly valued, but the last financial reports we have to rely on are from March 31, 2024. So, our valuation based upon current financial results could vary substantially. Our valuation methodology is proprietary and represents the price at which another entity would need to pay to purchase the company in a fair and equitable transaction (meaning that the acquisition would be accretive in a reasonable time). It is also based upon free cash flow rather than the more traditional valuation methods.Our algorithm kept us on the sidelines, but we also missed the gut-wrenching fall. We focus on companies that generate consistently superior results over time with the prospect of continuing for the foreseeable future.What to Consider NowThe possibilities are about as numerous as the problems. We cannot, in good conscience, recommend buying this stock outright or shorting it at the current level with so much still unanswered about the future. But what traders (not necessarily investors) might consider are options positions that could pay off handsomely if done correctly. None of the positions represents a recommendation. These are merely possible ways to play the situation depending on what outcome you may believe is most likely.Scenario 1If you believe the company will come out the other side unscathed (not a high probability in my opinion), then you may consider buying call options. If you expect the company to report its 10K and 10Q by December 31, 2024, you could consider purchasing January 17, call options with a $40 strike. The current price is about $3.75. If you are right about the positive outcome and timing, the stock could jump to $50 quickly, where you could sell your position for ~ $10, or a gain of 166%.But let me caution you, that even if you are correct about the outcome, you could be wrong about the timing and lose everything. A safer way to play the long side is to lengthen your expiration date to January 2026 or 2027. It would cost more up front but the potential for being right could be worth the extra money.Scenario 2Looking at a positive outcome but expecting that it could take longer for the stock to recover, consider purchasing a LEAPS (Long-term Equity Anticipation Securities) call option that expires on January 16, 2026. The current price for a call option with that expiration with a strike price of $40 (as of this writing) is ~ $11. If the stock price only gets to $50 over that period, you could lose $1, but if it goes as high as $70 (possible with the extra time), you could end up with a $9 profit, or an 82% profit. The other benefit of buying LEAPS is that, if you hold them for more than a year, it becomes a long-term gain with a lower tax rate.Still, there is the risk that you could be wrong about the outcome and maybe even the timing (it took more than a year for the company to regain its listing on NASDAQ the last time it had such problems)Scenario 3Another LEAPS contract to consider, (once again if you expect a positive outcome) is the January 15, 2027 call option with a strike of $38. The price is ~ $15. With two years before expiration, the AI craze could take SMCI much higher if it can overcome its problems. If the stock were to hit $80 during that time, you could sell the option for ~ $42 or more (depending on how much time to expiration is left), or a profit of ~ 180%. That is a little over double what the previous scenario offers due to the wait of up to 2 years instead of 1 year.The risk of getting the timing is less in this scenario, but profiting is still dependent on getting the outcome right.What if you believe that the company will be delisted for any number of reasons as mentioned earlier in this article? It would be best to keep the expiration date closer because there would always be the possibility that the company could right itself in the longer term.Scenario 4If you believe that SMCI will get delisted, you may want to purchase a put option with the expectation that the stock will fall again. If this happens, the stock is likely to go down even lower than it has so far.Consider purchasing the February 21, 2025 put option with a strike of $30 currently priced at ~ $6. If SMCI gets delisted, the stock will probably make a new low of $15 or less. If it does, you could sell to close your position for ~ $15 for a profit of ~ $9, or 150%.If SMCI does not get delisted, you will probably lose most, if not all, of your initial $6 investment.If you believe that the NASDAQ will deny the extension and delist within the next month, you could buy a put option to open a position with a closer expiration date, such as December 20, 2024. I am not going to suggest a preferred strike because, while this is possible, I believe it is not probable. However, your initial premium paid would be less and the potential profit could be more. But, again, if you are wrong, you could lose it all.Scenario 5I will do one more speculative position for those who believe that things could go wrong in the short term but that the company will eventually work through its problems and get back on track. In this instance, you might want to purchase the stock, but not at the current level. This is how I would approach it.Sell to open LEAPS put option with an expiration date of January 15, 2026 with a strike of $19 to collect a premium of ~ $5. If you are put the stock, you will need to pay the strike price of $19, but you have already collected the $5 premium when you sold the put option, so your actual cost would be ~ $14, well below the previous low. If you believe it will go lower, or you want to own it only at a lower price, adjust your strike price accordingly. You will also collect a lower premium, but the cost basis should be lower if the stock is put to you.Since you sold to open your position, you cannot exercise the option. You would be put the stock if someone who bought a put option with the identical strike and expiration decides to cut their losses and exercises the option. If the stock does not get low enough to warrant an exercise, you may be able to buy to close your position for less than the original price, or you could end up taking a partial loss. Alternatively, if the stock never goes down, you will just let the option expire worthless and keep your $5 premium collected when you initiated the trade. This would end up being a long-term gain and taxed at a lower rate.Scenario 6My final scenario is for those who already own the stock and would like to methodically reduce the cost basis. This requires you to own the stock in round lots divisible by 100 shares. For example, if you own 150 shares, you can only use 100 of those shares in this transaction.If you are not familiar with selling covered calls, you might want to take a few minutes to read this explanation from Invesopdeia.com.For every 100 shares you own, you can sell to open a covered call position, representing one call option contract. I would suggest keeping the expiration date relatively short so you can repeat this activity several times in a year if the stock remains depressed.First, you have to be willing to part with the shares if the price jumps unexpectedly before the expiration date. If not, please do not consider this trade.Using the December 20, 2024 expiration date, sell a covered call at the strike price of $45 to collect a premium of ~ $1.50. As long as the price of the underlying stock does not rise above the strike price, you will collect the premium and let the option expire worthless. This gain can be used to reduce your cost basis, thus not taxable until you sell the stock.You can repeat this process each month as long as it appears that the stock will remain depressed. Always sell a covered call above whatever price you believe the stock will be by the expiration date. If you get greedy, and do not adjust your strike price high enough, you could have your stock called away at the strike price.One Last Word of CautionIn every scenario mentioned above, one must remember that there is a possibility that you could lose the entire amount of your initial investment. Options are just a vehicle to potentially profit (or loss) from your expectation about a stock. If you are wrong about the direction of the outcome, you could lose. If you are wrong about the timing of the outcome, you could lose. The potential gains may be outsized compared to owning the underlying stock, but the losses could also be significant. While I understand options trading, I generally only use options to reduce my basis, add income from a position, or initiate a position below the current market price. In other words, I trade options around my core stock positions to enhance my income.Options are not for the faint of heart, nor those who are unwilling to take the time to understand how to use a particular strategy within the proper environment. There are different strategies for nearly every market and economic environment. Knowing what to use when is the key to winning. Not knowing and using the wrong strategy in the wrong environment is a sure path to losses.That is why, at Friedrich Global Research, we do not trade. We invest for the long term in companies that we expect to outperform the overall market consistently over time. 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