Supermicro shares fell by nearly a fifth on Wednesday, another dark day for the one-time booming AI darling. The drop came after the server hardware company delayed filing its annual financial report for fiscal 2024, which is often a warning to investors that a company may have significant financial, accounting or legal issues.
Supermicro's management told shareholders that it needs time to complete an evaluation of its internal controls over financial reporting.
A Supermicro representative confirmed to Fortune that the company will not file its 2024 annual report within the “stated time frame,” but gave no indication as to when the report might be filed. “We need additional time to evaluate certain of our internal controls,” the representative said, reiterating the company's official statement.
The delayed filing comes after Supermicro was accused on Tuesday of accounting manipulation and sanctions evasion by activist short seller Hindenburg Research.
In a brief 19,000-word report, Hindenburg Research said it found “clear accounting red flags, evidence of undisclosed related-party transactions and sanctions and export control violations.” The short seller and research firm conducted a three-month investigation into Supermicro, which included interviews with insiders and industry experts and a review of accounting and litigation records. Named after a famous airship disaster, the controversial company targets companies it believes are heading for dramatic decline. Hindenburg posts often trigger big stock price drops and legal and regulatory investigations.
When asked about the brief report, a Supermicro representative told Fortune, “The company does not comment on rumors or speculation.”
Supermicro provides servers, network equipment, storage systems and other critical components and solutions for data centers. With the AI boom in full swing in recent years, the demand for the company's products has exploded. Founded in 1993 by Charles Liang, the company joined the Fortune 500 for the first time this year after its annual revenue reached a record high of $7.12 billion.
Investors have been quick to recognize Supermicro's AI opportunity over the past few years, as the company's stock price soared 6,368% from about $19 per share in August 2019 to a high of $1,229 on March 8 of this year. Just 10 days later, the company was added to the S&P 500 index “in recognition of significant growth in revenue and market capitalization.”
But Supermicro has struggled recently. Though the company's revenue continues to grow at an impressive clip, rising server manufacturing costs and competition from Dell, Hewlett Packard Enterprise and IBM have put pressure on its margins. Gross margins fell to 11.3% in the company's fourth quarter, which ended in June, from 17% a year earlier. Following Hindenburg's short-term report, Supermicro's shares have fallen more than 65% from their March peak.
Super Micro allegations
Hindenburg's short report contains a number of significant allegations of wrongdoing and details why Hindenburg founder Nathan Anderson and his team are bearish on Supermicro stock. Fortune was not able to independently verify all of the allegations in the Hindenburg report.
Among the more serious allegations is that Supermicro continues to commit accounting violations that previously led to fines from the Securities and Exchange Commission (SEC).
In August 2020, Supermicro and its former CFO, Howard Hideshima, were charged by the SEC with “widespread accounting violations,” specifically improper recognition of revenue and understating expenses over a three-year period.
Melissa Hodgman, deputy director of the SEC's enforcement division, said in a statement after the charges were filed that misreporting revenue in this way “can give investors a distorted view of a company's financial condition.”
Hindenburg went a step further on Tuesday, alleging that this resulted in “artificially inflated sales, revenue and profit margins.” To make matters worse, the short seller alleged that just three months after Supermicro paid $17.5 million to settle its lawsuit with the SEC, the company began rehiring former executives involved in the scandal.
“Former salespeople told us, 'Almost everyone is back. Almost everyone who was fired and contributed to this misconduct is back,'” the Hindenburg report states.
Hindenburg said Supermicro was exporting high-tech products, including parts that could be used for military purposes, to Russia in violation of U.S. export embargoes.
“An examination of more than 45,000 import and export transactions indicates that Supermicro's exports of high-tech components to Russia have surged nearly threefold since the invasion of Ukraine and appear to be in violation of U.S. export embargoes,” the short sellers' report said.
The final big accusation concerns Supermicro's questionable financial relationships. Hindenburg noted that $983 million was paid to Supermicro's suppliers Ablecom and Compuware over the past three years. The problem, Hindenburg said, is that these companies are controlled and partly owned by Steve and Bill Liang, brothers of Supermicro CEO Charles Liang.
According to SEC filings, Steve Liang was Abelcom's largest shareholder and CEO as of the end of 2023. Bill Liang was also CEO of Compuware, a member of Compuware's board of directors, and held “a significant stake in Compuware.”
Hindenburg noted that trade records show that 99.8 percent of Abelcom's exports to the U.S. and 99.7 percent of Compuware's exports to the U.S. went to Supermicro. “The relationship appears to be strangely circular,” Hindenburg's report said.
Hindenburg's biography
Hindenburg Research, which Anderson founded in 2017, is a short-seller known for making large, typically very public bets against some of the biggest companies in finance.
In April 2023, the company targeted Carl Icahn, a billionaire who made his name as a “corporate raider” in the 1980s, alleging that his eponymous company, Icahn Enterprises, artificially inflated asset values and offered unsustainable dividends to lure retail investors into a “Ponzi-like” structure. Icahn Enterprises eventually cut its dividend in half, and the company's stock price has plummeted nearly 75% since the publication of the Hindenburg Short Report. Icahn settled a lawsuit with the SEC this year, agreeing to pay a $2 million penalty for failing to disclose that he had used most of his Icahn Enterprises shares as collateral for billions of dollars in personal credit loans.
Hindenburg also had a major falling out with Indian billionaire Gautam Adani, then Asia's richest man, in 2023, accusing him of engaging in a “brazen, decades-long stock manipulation and accounting fraud scheme.” The short-seller also famously targeted electric vehicle maker Nikola in 2020, accusing the company of making exaggerated claims about its vehicles, engaging in fraudulent marketing and misrepresenting its financials. Nikola's market capitalization has fallen from a peak of $34 billion in 2020 to just over $330 million today.
Now, market AI darling Supermicro is under intense Hindenburg scrutiny, surrounded as usual by lawyers and asking investors who have suffered big losses to come forward in the investigation of “potential securities litigation.”
