SMCI's Strong Fundamentals; Cautiously Assessing the Allegations
$SMCI (Super Micro Computer, Inc) is our pick for gaining exposure to AI in place of $NVDA. We believe SMCI offers a more attractive opportunity in the AI space due to the current market dynamics. Investors are more conservative about SMCI's forward revenue expectations. The market expects SMCI's growth to decelerate to mid-teens, viewing the GenAI boost as a temporary surge rather than a long-term trend - a stark contrast to how NVDA is priced. Consequently, if NVDA continues its strong performance, SMCI is likely to deliver more impressive results proportionally.
This strategy, however, comes with inherent risks. SMCI is part of the NVDA value chain, and its specific risks could potentially weaken its correlation with the broader GenAI trend. The most significant concern revolves around profit margins and market share within this value chain.
SMCI, primarily a server and now rack-level supplier, has traditionally been viewed as operating in a commoditized sector with low entry barriers, limited competitive advantages, minimal value-add, and little sophistication. Historically, this industry has been highly fragmented, characterized by thin margins and sluggish growth prior to the recent GenAI excitement.
However, a closer examination reveals a shifting landscape. GPU-centric AI data centres, particularly training clusters, are experiencing rapid increases in complexity. This is driven by advancements in scale-up and scale-out architecture - essentially, linking more and more GPUs together rather than focusing solely on improving individual GPU performance. The goal is to continue scaling data center compute capacity by orders of magnitude (OOMs). This trend aligns with what Synopsys co-founder termed 'SysMoore' - the concept that to maintain Moore's Law like progress, improvements in transistor density alone are insufficient, and system-level optimization is becoming increasingly crucial.
SMCI's expertise in high-end server rack design and integrated manufacturing sets it apart in the industry. Unlike other OEMs, SMCI's in-house capabilities enable the timely delivery of customized, high-performance GPU servers. This unique positioning, coupled with its prowess in liquid cooling tech, positions SMCI to capitalize on the ongoing GenAI wave more effectively than its competitors.
The company's liquid cooling solutions significantly enhance Power Usage Effectiveness and ROI for customers, allowing SMCI to capture a larger market share and extract greater value from the AI ecosystem. As data centres continue to scale up in terms of OOMs, SMCI is likely to play an increasingly crucial role in the AI infrastructure landscape.
However, recent developments have cast a shadow over SMCI's promising outlook. The Hindenburg short-selling report has raised serious concerns about the company's business practices, particularly regarding related-party transactions. While the evidence suggests potential fraud, it appears less severe. The accusations of channel stuffing, though noteworthy, seem less critical in comparison to the governance issues highlighted.
Adding to these concerns, SMCI's late notification for its 10K filing has triggered an impending SEC investigation. The expectation for an investigation has increased further since a number of law firms have been preparing for a class-action lawsuit on behalf of investors. These developments, combined with the scrutiny following the report, are likely to suppress SMCI's share price until the outcomes of the SEC investigation and lawsuits become public. Another word of caution is that it seems, at the current cash burn rate, SMCI will need to raise a few billion dollars more capital during the next several months. This will be challenging during an SEC investigation of this nature.
Despite challenges, we maintain a positive view on SMCI's fundamental positioning in the AI sector. The company remains a leading AI server maker, especially for Cloud Service Providers, and Hindenburg's speculation about SMCI's weakened market status seems at odds with its current industry standing.
Looking ahead, we anticipate potential improvements in SMCI's profitability as Direct Liquid Cooling technology matures. However, given the current uncertainties, we adopt a cautious approach. While SMCI has been a winning name for @NDI-FutureTech, we will only consider adding to our position when the margin of safety provides adequate protection against potential downside risks.
As this landscape continues to evolve rapidly, we will closely monitor SMCI's response to governance and transparency issues raised. The company's ability to address concerns while maintaining its technological edge and market position will be crucial in determining its long term prospects. We remain vigilant, balancing our optimism about SMCI's fundamental business strengths with a realistic assessment of the current risks and challenges it faces.
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