Here’s Betting Against Super Micro Computer Is a Good Idea

I’m focusing on as a short because there’s an increasing number of red flags that suggest a high probability that SMCI is the Hotel California of accounting fraud: you can check-in but you’ll never check-out. I think there’s a strong possibility that SMCI will not be operating in its current form 12-18 months from now.

While I think there’s value to SMCI’s business, it’s a matter of determining what’s real and what’s accounting fraud. It’s a low-margin business on which SMCI’s c-suite has been imposing accounting fraud to make the sales growth and profit margins appear bigger than reality. The incentive to do this, of course, is to boost the share price.

On Wednesday SMCI filed a Notification of Late Filing with the SEC stating that it is unable to file its FY 2025 Q1 10-Q. It also stated that it needs additional time to find an auditor, for the Special Committee of the Board to complete its review of SMCI’s procedures and controls and for the audit firm that is eventually hired to prepare and complete the FY 2024 10-K and FY ’25 10-Q.

The now must decide if it will delist SMCI or give the Company 180 days to fix the issues listed above. I have no idea how this will unfold but, quite frankly, this stock should not be trading given the complete lack of transparency with its financials for the last 5 quarters. In addition, NVDA pulled a big order for servers last week from SMCI.

SMCI’s shares jumped 16.6% from the close in thin after-hours trading Friday after Barron’s reported that “a person familiar with the matter” told Barron’s that SMCI intends to submit a plan on Monday in an effort to avoid delisting. Details were lacking but as of Friday SMCI had not hired an auditor to replace E&Y.

In fact, the Wall Street Journal published an article Friday morning titled “Is Anyone Crazy Enough to Audit Super Micro Computer?” The article referenced the possibility that E&Y found something missed by the previous accounting firm, Deloitte & Touche. D&T was fired by SMCI at the end of its FY 2023 (June 30, 2023). Thus, E&Y resigned as the auditor just 15 months after Deloitte was fired and before E&Y completed its FY 2024 year-end audit.

In other words, despite SMCI’s denials, there has to be some serious problems with SMCI’s accounting. Prior to E&Y’s resignation, in April a former employee (Bob Luong) who was the Head of Global Services filed a whistleblower lawsuit alleging that SMCI continued to falsify revenue recognition shortly after SMCI settled with the SEC and was relisted on the Nasdaq in 2020.

According to the court filing, Luong was terminated in April 2023 after refusing to comply with SMCI’s repeated requests to implement what Luong believed was revenue recognition accounting that violates SEC accounting regulations between late 2020 and 2022. The court filing has two pages of sordid details. This includes improper revenue recognition, recognizing revenue from incomplete sales and shipping products near quarter-end that SMCI knew had problems and would be returned for exchange after the quarter ended. In addition Luong alleges that SMCI would shift revenue services to hardware sales in order to boost the profit margin reported in the financials from hardware sales. Luong also cited circumvention by upper management of internal accounting controls.

In December 2022 Luong was placed on involuntary administrative leave and fired in April 2023. Note that Deloitte was fired two-and-a-half months later. I suspect that Deloitte was putting up resistance for the same reasons listed by Luong in his lawsuit. Deloitte was SMCI’s auditor when the Company delisted in August 2018 for failing to file financial statements for two consecutive years. After regaining compliance in January 2020, the SEC charged the Company with widespread accounting violations in August 2020. SMCI settled with the SEC shortly there-after.

I find it quite interesting that E&Y quit as SMCI’s auditor before it completed what would have been its first FY year-end audit in connection with the preparation of the 10-K to be filed with the SEC. Clearly E&Y discovered huge problems with SMCI’s accounting and controls and was unwilling to put its name on the Auditor’s Report which precedes the presentation of the financials in a 10-K.

In my opinion the writing is on the wall for SMCI. This Company is riddled with accounting fraud based on all of the “footprints in the snow.” I continue to believe that SMCI will be trading under $10 within six to twelve months. The problem with using puts right now to express this view is that if the stock is delisted the options cease trading. That said, I think the after-hours report that SMCI is filing a plan of compliance with the Nasdaq (though I don’t see how the report has substance since an audit firm has not been hired).

I hope the stocks pops this week because I would love to establish a longer-dated, OTM put position in this stock. I’ll be watching the price-action in the stock Monday at the open and I hope the stock runs into the mid-high $20’s.

As an aside, there’s still the potential for this stock to get delisted. If you take a bearish view on SMCI with puts, there’s delisting risk, meaning that the options cease trading if there’s a delisting. However, if you short the stock, that short position can be carried over into the OTC market, likely under the symbol “SMCIQ.” I really believe this stock is a no-brainer short.

NOTE: On Monday SMCI filed an 8-K in which t announced that it hired a new audit firm, BDO, and intended to file a Plan of Compliance. There’s just two problems. The 8-K contained a paragraph which would lead a discerning reader to conclude that the BDO engagement is contingent on BDO getting comfortable with the issues that led to the firing of Deloitte and the resignation of E&Y. Note that E&Y quit before it completed what would have been its first annual audit of SMCI’s numbers.

As it turns out, BDO is a shady “mid-tier” audit firm. The Public Accounting Oversight Board issued a report in which is stated that 86% of the audits by BDO that PCAOB insspected were deficient. This means that BDO had failed to collect evidence to support at least part of its audit conclusion.

I don’t know how this saga might play out in the near-term. But longer term, as the market figures out that the value-added of AI does not justify the massive market caps given to the AI-related companies. This is particularly true with the SMCI, which sports an operating margin that is below 10% – to the extent that operating margin can be trusted – and clearly does not command pricing power for what is basically a commodity product.