We came across a bearish thesis on Super Micro Computer, Inc. (SMCI) on Chit Chat Stocks’ Substack by Chit Chat Stocks. In this article we will summarize the bulls’ thesis on SMCI. SMCI Technologies, Inc. share was trading at $449.10 as of Sept 16th.
A close up of a computer server rack powering the backbone of a wireless infrastructure.
Adopting a cautious approach to investing, where companies are treated as “guilty until proven innocent,” can serve as a prudent safeguard against financial losses. This philosophy urges investors to avoid companies with even the slightest hint of suspicious activity or circumstantial evidence of potential wrongdoing. The rationale is simple: companies guilty of fraudulent accounting or unethical practices often face severe consequences, including going to zero. The main concern is protecting capital, and by excluding questionable companies from your portfolio, you mitigate the risk of significant losses.
It’s important to note that erring on the side of caution doesn’t harm anyone, even if your suspicions prove unfounded. It’s up to regulatory bodies like the SEC and the Department of Justice to investigate and prove any allegations. By holding companies to a higher standard than the market or legal authorities, you avoid unnecessary exposure to risk. Moreover, there is no shortage of viable investment options, so ruling out companies with questionable management or financial practices won’t leave you without alternatives.
This brings us to Super Micro Computer, a company that has raised several red flags. For one, the name itself is questionable, especially during a boom in AI, semiconductors, and computing technology. The stock has risen an extraordinary 1,000% over the past three years, another warning sign for cautious investors. Revenue was stagnant for years before suddenly spiking, which adds to the suspicion. More troubling is a short report from Hindenburg Research, accusing the company of various dubious activities. These include re-hiring executives fired for their involvement in a previous accounting scandal, inflating revenue through partial shipments and fake projections, and engaging in related-party transactions with family-owned suppliers, potentially boosting revenue artificially.
There are also allegations of undisclosed related parties and illegal sales to sanctioned countries like Iran, China, and Russia. Finally, the company’s much-hyped liquid cooling technology appears to be more bark than bite. Given these numerous red flags, the risk far outweighs the potential reward. The downside, if the accusations are proven true, could be as severe as a 90% stock decline. Therefore, Super Micro Computer should be put in the “penalty box” until proven innocent, as the potential gains are not worth the risk.
Super Micro Computer, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 47 hedge fund portfolios held SMCI at the end of the second quarter which was 35 in the previous quarter. While we acknowledge the risk and potential of SMCI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SMCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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