we got some massive news for super micro Computer stock investors as short seller Hindenberg research claims and accuses the company of accounting manipulation I'm going to go over what this news could mean for super micro Computer stock investors if it's an alarming Revelation if it's a reason for super micro computers to dump their shares or if this is just a big nothing burger and you could go on as you were investing in super micro Computer stock so let's take a look at the details I want to thank the mle fool for sponsoring this video visit full.com parev for the 10 best stocks to buy now all right so super micro Computer stock fell about 2% Tuesday Morning following a report from Hindenburg research claiming among other things accounting mation at the AI high flyer smci stock was down as much as 8% in premarket market trading following the headlines about the report and you can see the big fluctuation here in super micro Computer stock price this morning crashing down to $500 per share following the announcement of the report and then recovering most of that lost value now trading at $547 per share a couple of dollars below where the stock was trading at earlier in the day Hindenberg research went on to say that their 3-month investigation found laring accounting red flags and evidence of undisclosed related party transactions sanctions and Export control failures and customer issues The Firm disclosed that Tuesday it had taken a short position in super micro Computer stock so let me discuss a little bit about undisclosed related party transactions this could mean that super micro computer is selling its products to a business that's related to Super Micro computer it could be a relation where management owns part of that business or the company owns part of the other business and its sales going from one business that it owns to another business that it partly owns or it has relations with significant relations with and the underlying meaning of this or the reason why this is a red flag is because it downplay plays it reduces the quality of the sales the quality of the earnings the company has been delivering because it suggests that demand is not organic that demand for its products were manipulated or uh facilitated organized and not really for its products and I disagree with this sentiment here super micro computers Revenue growth has been over 100% for several quarters now and I don't think this would be the time where the company would be boosting its sales trying to make sales look better than they are because sales are already explosive and so I don't think this would be a time the company would be lifting sales numbers artificially now a lot can be inferred from the last sentence there that the firm has a short position on super micro Computer stock so they've looked at this company and they found that it was a good Target for taking a short position and of course they have their reasoning behind their short position and they're releasing this report so that other investors will follow them in shorting this stock or selling this stock the stock price they're trying to make the stock price go down so they can profit from their short position it's a very transparent move here from Hindenburg research this is a short seller this investment firm is known for selling short stocks this is what they do they're really good at what they do so this is unfortunate for super micro Computer stock investors that they are a target of Hindenburg research it's not good news to be a target of a short seller and I would say that they're a little bit late to the party super micro computers valuation was astronomical earlier in 2024 in fact this is when I told investors that it would be a good time to sell super micro Computer stock I had recommended super micro Computer stock as a Buy in early January and as the stock exploded I told investors to take profits when the valuation was near its peak and since then the valuation has come down it's more normalized now is Trading at a forward PE of 12 which is right around where it was trading at before the AI frenzy in 2023 so I think its valuation is more reasonable now even with the apparent risks in the company that Hindenberg research highlights and there are other risks including super micro computers falling profit margins and negative cash flow from operations as it struggles to support its astronomical growth rates those are the risks that I think are most prevalent for super micro Computer stock investors the risks that Hindenberg research highlights I think plays second fiddle to the risks that the company had already been demonstrating throughout 2024 which were the falling profit margins and negative cash flow from operations to support this phenomenal growth so Hindenberg claims that despite the $17.5 million settlement in August of 2020 with the SEC following an inquiry for widespread accounting violations super micro's business practices did not improve and Senior Executives who had left amid the Scandal were later rehired so this is a opportunity for Hindenberg to highlight the company's settlement with the SEC in August of 2020 as a point of evidence to support its short thesis it's undoubtedly one of the reasons why super micro was targeted because they had previous violations with the SEC and this makes for a good Target if you're a short seller looking for a company to short of course a company that's had previous violations is one that you can claim is continuing to make violations and continuing to not play fair in terms of the accounting reporting and accounting um disclosures that they're required to make so what does this all mean for super micro Computer stock investors is this a report a is this a reason for super micro Computer stock investors to dump the stock is this a glaring red flag that means you should not own the stock I don't think so I've been following super micro Computer stock all year long and I've been highlighting the company's risks and it's a risky stock it's exploding Revenue growth and I've highlighted how difficult it is to manage a hardware business a business that sells physical things with Revenue growth that's exploding as fast as it is it's not easy to manage the logistics of that kind of growth for a business at this size with negative cash flow because of that growth right negative cash flow happens when you're in a hardware business because you're paying for the inventory before you're getting the money from customers so it's been a risky stock and I had it recommended as a buy earlier in January I told investors to sell or I said that it was a good time to take profits when the stock price had soared and following this dip in stock price I upgraded super micro Computer stock so I last updated my recommendation for super micro Computer stock to a borderline Buy on August 6th following my evaluation of the company's latest earnings release and the decline in the company's valuation after this news from Hindenburg research I'm not changing my recommendation I don't see anything in and I didn't see anything from the report that suggests it's a reason to change anything I was considering for super micro computer I keeping I'm keeping the stock recommended as a borderline buy the risks to the company are the declining gross profit declining profit margins and the negative cash flow and the difficulty in supporting this kind of Revenue growth for a hardware business did you know that over 90% of the people that watch my channel are not subscribed it'll really help support my channel if you hit that subscribe button and oh by the way one of the benefits of being subscribed is that I take request from subscribers more often than I do from non-subscribers so if you prefer that benefit please subscribe to the channel