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Things are going from bad to worse for Supermicro (SMCI). In June, SMCI stock fell badly after Supermicro announced that it was seeking $7 billion in funding to pay for a backlog of $39 billion in orders. More recently, however, the company’s offices in Taiwan were raided by local government agents as part of an ongoing investigation related to allegations of smuggling Nvidia (NVDA) GPUs into China.
SMCI stock fell 8% on June 29 and is now down 46% in the last month. Investors are understandably cautious. Supermicro doesn’t have the best of reputations, considering it was temporarily delisted from the Nasdaq in 2018 for not filing timely financial reports, then fined in 2020 by U.S. regulators for accounting violations.
Supermicro has proclaimed its innocence and is cooperating with authorities. But the recent scandal is another chapter in a string of controversies weighing on SMCI stock.
What's Going on With Supermicro Right Now?
According to Bloomberg, investigators in Taiwan “raided the residences of six people” and three affiliated companies in the Keelung district. Raids were also conducted at Supermicro's offices, Taiwan-based data-center operator Chief Telecom, and distributor Albatron Technology.
These raids are notable because Taiwanese law doesn’t view AI chip exports to China as a crime. However, authorities are considering enacting such legislation, as it aims to align with the U.S., which has been restricting sales of advanced chips to China.
In March, the U.S. indicted Supermicro co-founder Yih-Shyan “Wally” Liaw, sales manager Ruei-Tsang “Steven” Chang, and contractor Ting-Wei “Willy” Sun on charges that they allegedly attempted to divert $2.5 billion in Nvidia-powered AI servers to China in violation of U.S. export controls. All three were terminated or resigned, and the company has hired an outside law firm and forensic firm to conduct an independent investigation.
Management doesn’t believe Supermicro will need to restate earnings. “The initial transaction – Supermicro's sale of products to an authorized reseller – followed a rigorous vetting and review process that exceeded applicable government requirements,” the company noted in a statement. “This case highlights the challenges that can arise when products are resold through multiple downstream parties beyond direct manufacturer control. It also underscores the importance of continued collaboration across industry and government to strengthen safeguards, enhance supply chain visibility, and facilitate the enforcement of export control laws. Supermicro will continue to cooperate with law enforcement and government officials in the United States, Taiwan and other jurisdictions to ensure our technology is distributed as lawfully intended.”
How Should Investors Play SMCI Stock Now?
Even before the raids, both investors and analysts were exercising caution with SMCI stock. Not only are there potential legal issues, but the company is in the process of diluting shares through $5 billion in stock sales underwritten by investment banks, including $1.25 billion in new common shares and $3.75 billion from depository shares. Supermicro is also proposing a $2 billion at-the-market (ATM) offering, meaning the company would sell up to that level over time.
The underwritten offer will result in 45.45 million shares of common stock at a public offering price of $27.50 per share and 75 million depositary shares — each representing a 1/20 interest in a share of newly issued 7% Series A mandatory convertible preferred stock — at a public offering price of $50 per share.
Supermicro stock has a consensus “Hold” rating based on 20 analysts with coverage, with a mean price target of $36.94 representing 37% potential upside. But I’m not convinced that even that potential gain makes SMCI stock any more enticing right now, despite a bullish upgrade one analyst gave just days ago.
Supermicro arguably plays an important role in the buildout of artificial intelligence. Its custom server motherboards, cooling racks, and other hardware help bundle GPUs to ensure they are working together to complete high-performance computing tasks.
But the company has had too many issues over the last few years to make the risk worthwhile. Considering the stock dilution and the ongoing legal issues, I’m staying away from SMCI stock for at least the rest of the year.
