Hindenburg Research Discloses Short Position in Super Micro

Hindenburg Research has revealed that it has taken a short position in the shares of Super Micro Computer Inc. The firm, known for its investigative reports on publicly traded companies, has raised concerns about the server maker’s business practices.

Allegations of Accounting Manipulation and Self-Dealing

According to Hindenburg, there is new evidence suggesting that Super Micro has engaged in accounting manipulation. The report also accuses the company of sibling self-dealing, where transactions benefit the personal interests of those closely related to the company’s leadership.

Concerns Over Sanctions Evasion

Hindenburg’s report further alleges that Super Micro has been involved in evading sanctions. These claims are particularly significant given the company’s prominence in the AI sector, which has attracted considerable investor interest.

Super Micro’s Rapid Growth Amid AI Boom

Super Micro Computer Inc., headquartered in Silicon Valley, California, has seen substantial growth, with its market capitalization reaching $35 billion. The company’s success has been largely driven by the recent surge in AI-related demand, making it a key player in the server manufacturing industry.

Super Micro Computer Inc., a Silicon Valley-based server manufacturer valued at $35 billion, has surged in prominence thanks to the growing enthusiasm for AI technology.

Our three-month investigation, which involved interviews with former senior employees, industry experts, and an extensive review of litigation records, corporate documents, and international customs records, uncovered significant accounting irregularities, evidence of undisclosed related-party transactions, failures in adhering to sanctions and export controls, and issues concerning customer relations.

In 2018, Super Micro was briefly delisted from Nasdaq due to its failure to file financial statements. By August 2020, the SEC charged the company with “widespread accounting violations,” primarily involving the improper recognition of over $200 million in revenue and the understatement of expenses, which artificially inflated the company’s sales, earnings, and profit margins.

Less than three months after agreeing to a $17.5 million settlement with the SEC, Super Micro began re-hiring top executives who were directly involved in the accounting scandal, according to litigation records and interviews with former employees.A former salesperson told us, “Almost everyone who was let go because of the wrongdoing is back now.”

According to a lawsuit filed in April 2024, just three months after settling with the SEC, Super Micro resumed practices like “improper revenue recognition,” counting incomplete sales as finished, and bypassing internal accounting controls.

Even after the SEC settlement, the pressure to meet sales targets led salespeople to push products to distributors using tactics like “partial shipments” or sending defective products at the end of a quarter, according to interviews with former employees and customers.

One former salesperson explained how they would send products to distributors based on made-up demand forecasts, complete a partial shipment, and then later come up with an excuse for why the rest wasn’t delivered. “And now you have a problem. Maybe an accounting problem.”

Former employees told us that Super Micro’s business culture hasn’t improved. A former senior sales director said, “I don’t think the company’s behavior has changed much in the five years since I joined, and I started shortly after the delisting issue.”

Three senior employees who left in early 2018 during the accounting scandal were rehired. One is now a board member, another is a consultant working closely with the CEO, and the third is a Vice President of business development.

A former salesperson told us, “Almost everyone who was let go because of the wrongdoing is back now.”

According to a lawsuit filed in April 2024, just three months after settling with the SEC, Super Micro resumed practices like “improper revenue recognition,” counting incomplete sales as finished, and bypassing internal accounting controls.

Even after the SEC settlement, the pressure to meet sales targets led salespeople to push products to distributors using tactics like “partial shipments” or sending defective products at the end of a quarter, according to interviews with former employees and customers.

One former salesperson explained how they would send products to distributors based on made-up demand forecasts, complete a partial shipment, and then later come up with an excuse for why the rest wasn’t delivered. “And now you have a problem. Maybe an accounting problem.”

Former employees told us that Super Micro’s business culture hasn’t improved. A former senior sales director said, “I don’t think the company’s behavior has changed much in the five years since I joined, and I started shortly after the delisting issue.”

Three senior employees who left in early 2018 during the accounting scandal were rehired. One is now a board member, another is a consultant working closely with the CEO, and the third is a Vice President of business development.

Former CFO Howard Hideshima left Super Micro in January 2018 and was later charged by the SEC with accounting violations. In May 2023, he was hired by a related company owned by the brother of Super Micro’s CEO.

A new CFO, known for his integrity, was brought in during January 2018 to help the company recover from the scandal. He played a key role in getting Super Micro re-listed but resigned in January 2021. A former sales director suggested that he may have been pushed out.

In addition to new concerns about revenue accounting, we discovered that Super Micro’s relationships with both disclosed and undisclosed related parties create opportunities for questionable accounting practices.

For instance, disclosed related-party suppliers, Ablecom and Compuware, both controlled by the brothers of Super Micro’s CEO Charles Liang, have received $983 million from Super Micro over the last three years. Ablecom is also partially owned by Charles Liang and his wife.

These relationships appear unusually circular. Super Micro provides components to these companies, which then assemble the parts and sell them back to Super Micro. They also rent warehouse and factory space to Super Micro, despite Super Micro having its own large factory.

These related companies seem to have little business outside of Super Micro: about 99.8% of Ablecom’s U.S. exports since 2020 were to Super Micro, and around 99.7% of Compuware’s U.S. exports were also to Super Micro, according to trade records.

Concerns have arisen around undisclosed related parties linked to Super Micro’s CEO. His youngest brother owns two Taiwan-based entities supplying Super Micro, operating from the company’s Science and Technology Park, but these relationships are not disclosed. Another brother is involved in undisclosed Hong Kong and Taiwanese entities reselling Super Micro products. These undisclosed connections pose risks to revenue recognition and margins.

Additionally, in February 2024, Super Micro made an undisclosed investment in Lambda Labs, followed by a $600 million contract in August 2024 to lease and sub-lease space to Lambda, raising further governance concerns. In October 2023, related parties run by the CEO’s brothers reportedly invested in Leadtek, a company selling products similar to Super Micro’s, yet no relationship with Leadtek has been disclosed.

Super Micro touts its liquid cooling technology as a “revolutionary” competitive edge, yet recently showcased related party Ablecom’s solutions at an industry event, despite never disclosing any related party involvement. Ablecom holds several patents in this area, raising questions about transparency.

In 2006, Super Micro pleaded guilty to illegally exporting components to Iran, a mistake the CEO claimed they learned from. However, since the U.S. imposed export bans following Russia’s invasion of Ukraine, Super Micro’s exports to Russia have reportedly tripled, potentially violating these bans. At least 46 companies handling Super Micro products in Russia are now under U.S. sanctions or on watchlists.

Nearly two-thirds of Super Micro’s exports to Russia since the invasion are “high priority” components, potentially diverted to the battlefield, according to U.S. government warnings. One major Russian importer, Niagara Computers, received over $46 million worth of Super Micro products, initially through a California distributor and later through Turkish shell companies, one of which was sanctioned for smuggling.

Around $30 million worth of Super Micro components were also sent to Russia’s largest importer of dual-use chips via a Hong Kong shell entity, now under OFAC sanctions. Since 2016, Super Micro has had a joint venture with Chinese state-run Fiberhome, a company involved in human rights violations, and has sold $196 million in components to this JV despite U.S. government watchlists.

Super Micro also faces competition and quality issues, leading major companies to reduce or drop their business. Nvidia’s CEO recently endorsed competitor Dell, and CoreWeave, Super Micro’s largest customer, signed a major deal with Dell for GPU servers in December 2023.

Tesla, once exclusively sourcing servers from Super Micro, has shifted to Dell for major deals, including for Elon Musk’s xAI, eroding Super Micro’s exclusivity, according to May 2024 reports. Super Micro has admitted it’s “under-indexed” with top tech companies, with Amazon AWS and Digital Ocean among those cutting ties due to service and delivery issues.

Genesis Cloud, touted as a success story by Super Micro, faced severe technical problems, while GMI Cloud reported a 17.5% malfunction rate on Super Micro servers and is now switching to HPE. NexGen Cloud, building an AI super-cloud in Europe, experienced frequent firmware issues with Super Micro products.

Poor after-sales service is cited by multiple former employees and partners as a major weakness, with one describing it as the company’s “Achilles heel.” Overall, Super Micro faces significant challenges in accounting, governance, and product quality, losing ground to more reliable competitors.

Source: Hindenburg Research Report

Update

Super Micro Computer $SMCI has extended its decline to 25% today after announcing a delay in filing its FY2024 10-K report. The stock has now plummeted 34% since Friday and is down approximately 68% from its all-time high.

The company stated that it requires additional time “to complete an assessment of its internal controls over financial reporting.” This development is particularly troubling for investors, as $SMCI has been a prominent and popular stock within the AI sector.

The recent sharp declines in the stock are raising significant concerns among market participants.

Update

Supermicro has reassured its customers and partners that despite a delay in filing its FY24 Annual Report and the release of a recent short-seller report, the company’s operations and product offerings remain unaffected.

CEO Charles Liang emphasized that the company does not anticipate any significant changes in its Q4 or FY24 financial results and continues to experience strong financial performance.

This year, Supermicro has shipped approximately 2,000 liquid-cooled AI racks, securing over 75% of the market share. The company remains committed to innovation, customer service, and robust growth, as it moves into 2025 with a strong order backlog and leading market positions.

Update

Super Micro Computer ($SMCI) is under investigation by the U.S. Justice Department for possible accounting violations. Trading has resumed, and the stock has dropped more than 9% today. The company is facing significant accounting concerns, especially after delaying the filing of its 10-K report.