Super Micro Computer Stock: Opportunity Dip on Short Report?

Key Points

• Super Micro Computer stock sold off after a short report was issued attacking the company's financial practices. 
• Diving into the numbers does show some discrepancies, but not enough to condemn the company as a fraud. 
• Wall Street analysts still see a higher valuation, and institutions kept buying the stock.

There aren’t too many opportunities to buy a stock at a discount after recent drama and volatility, but the market offers such low-hanging fruit every once in a while. Most recently, an outage fixed within 48 hours brought shares of CrowdStrike Holdings Inc. NASDAQ: CRWD lower by over 40% in a couple of weeks. Investors who took advantage of this opportunity would be sitting on close to 32% gains today.

Realizing that this outage had no material impact on the core business or the future of its operations could have led those brave enough to bet against the crowd to buy this discounted stock. Another opportunity might have been taken in shares of Nike Inc. NYSE: NKE after its quarterly earnings results, a short-term dip that mega investor Bill Ackman took advantage of when he bought into the company.

Today, the most recent opportunity is found through Super Micro Computer Inc. NASDAQ: SMCI. A new report from Hindenburg Research has been published accusing the company of committing accounting fraud, a direct hit from the short side attempting to bring the stock down. And down it went, by as much as 23% in recent days, but it’s not all bad news, it seems.

Cutting Through the Noise: Key Insights into Super Micro Computer's Financials

The Hindenburg report points to a change in the way that Super Micro Computer recognizes its revenue, which seems advantageous to its capital cycle and, therefore, its reported financials. This is not the first time a company has done this, nor will it be the last; as businesses change, so do their accounting practices.

As long as they are generally accepted accounting principles (GAAP), there is nothing for investors to worry about, and here is where the figures can be accepted. Net income expanded to $352.7 million, according to the second quarter 2024 earnings press release, up by 82.3%.

Here is where things get tricky: The number of shares outstanding grew by roughly 6 million over the quarter. If the company had such a net income growth spurt, then why would it need to issue stock to fund further operations? Couldn’t they just use some of this cash flow? Well, this is where the short report could have some weight.

Operating cash flows (found in the cash flow statement) were negative $2.4 billion compared to positive cash flows of $663.5 million a year prior. Because of the changed accounting standards, which led Super Micro Computer to recognize up to $5.3 billion in sales (which might have been premature), investors could have been misled as to the current state of financials.

The main reason for this divergence is that the company operates mostly in the software as a service (SaaS) niche of the technology sector, which deals with subscriptions and other contracted revenues that can be recognized before the whole life of the contract has gone through. Therefore, the negative cash flow versus positive net income.

Is There More Downside Risk Ahead for Super Micro Computer Stock?

The short answer is that it depends on how the market reacts to further developments, which haven’t been encouraging lately. Coincidentally, the company delayed its annual report released this week right after the short report came out attacking its accounting practices, creating further tension for shareholders.

Now that the stock trades at only 45% of its 52-week high, it would seem that the downside is limited for it to keep selling off, but that’s only half the technical picture. The other half can be deduced from how the rest of the market feels about the stock.

Short interest rose by 42.3% over the past month for Super Micro Computer stock, which is understandable considering what has happened to the company recently. However, the rise in short positions could also set the stock up for a potential short squeeze. After the rise in short positions, the percentage of shares now held in short positions is up to 13.8%.

Some of Wall Street’s most powerful banks have the manpower to pour through this short report and try to find the discrepancies in the financials to prove them right or wrong, so looking at analyst ratings after this hit can be a good place to gauge the stock.

Those at Barclays stood by their “Overweight” rating for Super Micro Computer stock, with a price target of $693 a share, implying that there is still up to 56.2% upside from where it traded down. Additionally, Goldman Sachs analysts did lower their price targets from $775 to $675 a share, which still calls for up to 52.1% of today’s prices.

More than that, institutional buyers seem unshaken by this report. Those at the Bank of Montreal have boosted their positions by 15.7% as of August 2024, bringing their net investment up to $61.8 million today. This is a drop in the barrel, considering that as much as $5.6 billion made its way into the company over the past 12 months.