A Rare Short For You
I am shorting Super Micro Computers, it's a hard trade and not for everyone.
The following short position has been described at my full service at FundamentalTrends.com courtesy to you as a founding member of Kirk’s Growth Stocks.
I do not short stocks often. In fact, most years I have no short bets placed at all. I am long-only at my investment firm. In my personal account, I only short if I think there is asymmetric upside with low risk. That doesn’t happen often.
I recently reinitiated the rough equivalent of a short position, which I discussed in a recent appearance on Stocks On Spaces on X.com (the social media formerly known as Twitter), on a well known semiconductor industry stock that has run into trouble and appears that it is very likely to fall 80-90% further into low single digits from a price recently above $40.
I am taking an short equivalent position on Super Micro Computer (SMCI) through buying puts on SMCI.
Previously, I was short Super Micro Computer for valuation reasons in 2022. That trade worked out well as the stock fell from its highs. I am short now for reasons that I think could put the company on the verge of bankruptcy by year-end 2025.
The Hindenburg Is Landing
In August 27th, 2024, Hindenburg Research released a damning short report on Super Micro Computer. A lot of the research was a rehash of problems that many of us were aware of over the past several years. For much of the market, especially the trader chasers who inhabit trading rooms and like to run in same direction together, it was “big news” and a reason to stampede.
The stock fell from the close on August 26th at $56.25 to a closing price on August 28th of $44.35. About this time, a Motley Fool writer who I knew from when I tried them on for size, argued with me about my Super Micro skepticism when I warned members of my investing service not to buy the stock, as he was long SMCI.
The stock eventually set a new 52-week low on Friday, November 15th of $17.25. The Fool writer capitulated, sold and explained away his mistake.
On Monday, November 18th, Super Micro announced that BDO would replace their resigned auditor Ernst & Young. From there, a furious rally occurred as the narrative shifted to hopium.
On December 4th, with the share price about $40, I bought February $35 puts for about $5 and April $30 puts for about $4.50. Both are currently profitable as the stock has fallen since.
The summary of Hindenburg’s research is below, but I suggest you read it.
Here I will pause to say, I do not like most of short research that is floating around the bear dens of the internet. I think it is superfluous, not well thought out and just part of a narrative selling hype machine. I think Hindenburg is one of the most reputable short shops out there.
Hindenburg found:
Accounting and governance issues, including the rehiring of executives involved in previous accounting and channel stuffing scandal back in 2019.
This is something I was aware of as I watched the stock price soar in 2021. In addition, I am skeptical that they can show all of the cash and short-term investments they claim. We’ll see if new auditor BDO can confirm those holdings.
They cited evidence of continued channel stuffing and improper revenue recognition after SEC settlement, according to former employees and recent lawsuit.
Former employees confirm business culture hasn’t improved since previous accounting issues.
This something my friends in Silicon Valley, whom I visit a couple times per year and communicate with regularly, had said to me on several occasions the past few years, so it resonated.
Hindenburg cited that Super Micro paid $983 million over 3 years to related party suppliers Ablecom and Compuware, controlled by CEO’s brothers. They cited other undisclosed related party transactions with additional entities owned by CEO’s brothers operating from same facilities. The result was circular relationships where Super Micro provides components to related parties who assemble and sell back.
These types of arrangements had been suggested to me and I am naturally wary of related party transactions, especially in foriegn markets that do not have a strong SEC type entity policing.
Several customers have left or reduced orders, including:
CoreWeave (largest customer), the company backed by partner Nvidia (NVDA) moving business to Dell (DELL).
Tesla (TSLA) no longer exclusive customer.
Amazon (AMZN) AWS ended relationship.
These sorts of changes I think are tip of the iceburg to what will happen in 2025. I see a rush to the exit coming. It is simply too easy to switch to more reputable Dell or HP Enterprise (HPE).
Several clients demonstrated high product failure rates as reported by customers:
GMI Cloud: 17.5% failure rate on server orders
Genesis Cloud: ~10% failure rate
NexGen Cloud: Up to 50% of orders had firmware issues
Super Micro’s margins are falling from middle teens to around 10-11% as core server products are becoming more commoditized.
See the competition I cited above.
Hindenburg also cited exports to Russia had increased 3x since invasion despite claimed halt of sales, with 46 companies handling SMCI products now under sanctions.
Sanctions evasion is where I will expand, as I see it as a potential destroyer of the company. This is the main reason I bought puts on the hopium, turnaround, it’ll all be okay, they make lots of money, narrative rally.
Sanctions Evasion Could Destroy SMCI
The U.S. government recently asked Nvidia to explain how it’s AI chips ended up in China after doing spot checks. Nvidia deflected by asking Dell and Super Micro how the chips got there.
I think we need to be aware of the shell games that can be played to move products around the world. We see it in oil that evades sanctions.
The same shell gaming is apparently true for semiconductors. In the case of Nvidia’s chips through Super Micro channels, it could all be the other guys and not Super Micro doing the bad things.
I’m skeptical that it’s all the other guys though. Given the track record at Super Micro and what people tell me about the culture at the company I think they might have big rocks about to hit their windshield. Yes, that is subjective, but so is a lot of investing.
The Information reported that 5 different people who smuggled chips say they did it using Super Micro.
Here’s what could be a harbinger. Nvidia said this: “We insist that our customers and partners strictly adhere to all export control restrictions. Any unauthorized deviation of previously-owned products, including any grey market resales, would be a burden on our business, not a benefit…”
And there it is. The first sign of CYA by Nvidia.
The relationship between Nvidia CEO Huang and Super Micro CEO Liang is thought by many to be transcendent because they have been doing business together for about 30 years.
I would submit that the almighty dollar could change that.
If Nvidia has to throw someone under the bus for their AI chips ending up in China, Super Micro is the easiest sacrifice to make, guilty or not. The likelihood, in my opinion, that they are probably shouldering at least some guilt, is reason to think that Nvidia takes some punitive measures against them.
If Nvidia pulls product from Super Micro they are toast.
Also, there is a DOJ investigation into Super Micro. I do not think the new Trump Administration is going to back off given the chips went to China. If there is guilt found, then the penalty could be to end the company.
There is no assurances any of that happens. Super Micro could be fully exonerated and go back to record orders in the next year or two. I’m betting that is not the case.
My Next Moves On Shorting SMCI
I have given a brief synopsis of my thoughts on Super Micro and why have bought puts. This is my only, therefore, best short idea for 2025.
I could add a few more shorts in 2025 as I have suggested a correction likely takes place, but, I am more of a long volatility a couple times a decade guy. And, I think bonds are on the verge of being a buy again in coming quarters. For most folks, simpler trades are best.
The current short interest in SMCI is about 15%, so shorting is not cheap, which is another reason most folks should not participate in this sort of trade. Rather, just don’t buy SMCI and if you own it, sell the thing before it craters again as I expect.
That said, I am looking to add put options a bit further out expirations and at $25 and/or $20 strike prices. I do not use margin, so, if you are experienced in using margins, then you have other choices.