Super Micro’s $50 billion stock collapse underscores risk of AI hype
Charles Liang, CEO of Super Micro Computer, during the AMD Advancing AI event in San Jose, California, on Dec. 6, 2023.
David Paul Morris | Bloomberg | Getty Images
In March, Super Micro Computer was added to the S&P 500 after an epic run that lifted the stock by more than 2,000% in two years, dwarfing even Nvidia’s gains.
As it turned out, S&P was calling the top.
Less than two weeks after the index changes were announced, Super Micro reached its closing high of $118.81 and had a market cap of almost $70 billion. The stock is down 72% since then, pushing the valuation to under $20 billion, the first major sign in the public markets that the hype around artificial intelligence may not all be justified.
Super Micro is one of the primary vendors for building out Nvidia-based clusters of servers for training and deploying AI models.
The stock plunged 33% on Wednesday, after the company disclosed that its auditor, Ernst & Young, had resigned, saying it was “unwilling to be associated with the financial statements prepared by management.” Super Micro is now at risk of being delisted from the Nasdaq, and has until Nov. 16 to regain compliance with the stock exchange.
“We see higher delisting risk in the absence of an auditor and the potential challenge to getting a new one,” analysts at Mizuho, who have the equivalent of a hold rating on the stock, wrote in a report on Wednesday.
Ernst & Young was new to the job, having just replaced Deloitte & Touche as Super Micro’s accounting firm in March 2023.
A Super Micro spokesperson told CNBC in a statement that the company “disagrees with E&Y’s decision to resign, and we are working diligently to select new auditors.”
Representatives for Ernst & Young and Deloitte didn’t respond to requests for comment.
Super Micro vs. Nvidia
For much of Super Micro’s three decades in business, the company existed well below the radar, plodding along as a relatively obscure Silicon Valley data center company.
That all changed in late 2022 after OpenAI’s launch of ChatGPT set off a historic wave of investment in AI processors, largely supplied by Nvidia. Along with Dell, Super Micro has been among the big tangential winners in the Nvidia boom, packaging up the powerful graphics processing units (GPUs) inside customized servers.
Super Micro’s revenue has at least doubled in each of the prior three quarters, though the company hasn’t filed official financial disclosures with the SEC since May.
Wall Street’s mood on the company has shifted dramatically.
Since the S&P’s announced index changes in March, Super Micro’s stock has dropped at least 10% on six separate occasions. The most concerning slide, prior to Wednesday, came on Aug. 28, when the shares sank 19% after Super Micro said it wouldn’t file its annual report with the SEC on time.
“Additional time is needed for SMCI’s management to complete its assessment of the design and operating effectiveness of its internal controls over financial reporting as of June 30, 2024,” the company said.
Noted short seller Hindenburg Research then disclosed a short position in the company, and said in a report that it identified “fresh evidence of accounting manipulation.”
‘Clock ticking’
The following month, Super Micro said it had received a notification from Nasdaq, indicating that the delay in the filing of its annual report meant the company wasn’t in compliance with the exchange’s listing rules. Super Micro said Nasdaq’s rules allowed the company 60 days to file its report or submit a plan to regain compliance. Based on that timeframe, the deadline would be mid-November.
It wouldn’t be the first for Super Micro. The company was previously delisted by the Nasdaq in 2018.
Wedbush analysts see reason for worry.
“With SMCI having missed the deadline to file its 10K and the clock ticking for SMCI to remedy this issue, we see this development as a significant hurdle standing in the way of SMCI’s path to filing in time to avoid delisting,” the analysts, who recommend holding the stock, wrote in a report.
As Super Micro’s stock was in the midst of its steepest selloff since 2018 on Wednesday, the company put out a press release announcing that it would “provide a first quarter fiscal 2025 business update” on Tuesday, Nov. 5.
That’s Election Day in the U.S.
Super Micro’s spokesperson told CNBC that the company doesn’t expect matters raised by Ernst & Young to “result in any restatements of its quarterly financial results for the fiscal year ended June 30, 2004, or for prior fiscal years.”
Beyond Super Micro, the evolving incident is a potential black eye for S&P Dow Jones. Since Super Micro replaced Whirlpool in the S&P 500, shares of the home appliance company are down about 3%, underperforming the broader market but holding up much better than the stock that took its place.
Inclusion in the S&P 500 often causes a stock to rise, because money managers tracking the index have to buy shares to reflect the changes. That means pension and retirement funds have more exposure to the index’s members. Super Micro shot up 19% on March 4, the first trading day after the announcement.
A spokesperson for S&P Global said the company doesn’t comment on individual constituents or index changes, and pointed to its methodology document for general rules. The primary requirements for inclusion are positive GAAP earnings over the four latest quarters and a market cap of at least $18 billion.
S&P is able to make unscheduled changes to its indexes at any time “in response to corporate actions and market developments.”
Kevin Barry, chief investment officer at Cantata Wealth, says greater consideration should be given to a stock’s volatility when additions are made to such a heavily tracked index, especially given that tech already accounts for about 30% of its weighting.
“The chances of a stock going up 10 or 20 times in a year or two and then having an indigestion moment is extremely high,” said Barry, who co-founded Cantata this year. “You’re moving out of a low volatility stock into a higher volatility stock, when tech already represents the largest sector by far in the index.”
— CNBC’s Rohan Goswami and Kif Leswing contributed to this report
Apple CEO Tim Cook (C) joins customers during Apple’s iPhone 16 launch in New York on September 20, 2024.
Timothy A. Clary | Afp | Getty Images
Apple’s second-largest division after the iPhone has turned into a $100 billion a year business that Wall Street loves.
In Apple’s earnings report on Thursday, the company said it reached just under $25 billion in services revenue, an all-time high for the category, and 12% growth on an annual basis.
“It’s an important milestone,” Apple CFO Luca Maestri said on a call with analysts. “We’ve got to a run rate of $100 billion. You look back just a few years ago and the the growth has been phenomenal.”
Apple first broke out its services revenue in the December quarter of 2014. At the time, it was $4.8 billion.
Apple’s services unit has become a critical part of Apple’s appeal to investors over the past decade. Its gross margin was 74% in the September quarter compared to Apple’s overall margin of 46.2%.
Services contains a wide range of different offerings. According to the company’s SEC filings, it includes advertising, search licensing revenue from Google, warranties called AppleCare, cloud subscription services such as iCloud, content subscriptions such as the company’s Apple TV+ service, and payments from Apple Pay and AppleCare.
On a January 2016 earnings call, when the reporting segment was relatively new, Apple CEO Tim Cook told investors to pay attention.
“I do think that the assets that we have in this area are huge, and I do think that it’s probably something that the investment community would want to and should focus more on,” Cook said.
Over the years, Apple has compared its services business to the size of Fortune 500 companies, which are ranked by sales, to give a sense of its scale. After Thursday, Apple’s services business alone, based on its most recent run rate, would land around 40th on the Fortune 500, topping Morgan Stanley and Johnson & Johnson.
Services appeals to investors because many of the subscriptions contained in it are billed on a recurring basis. That can be more reliably modeled than hardware sales, which will increase or decrease based on a given iPhone model’s demand.
“Yes, the the recurring portion is growing faster than the transactional one,” Maestri said on Thursday.
Apple’s fourth-quarter results beat Wall Street expectations for revenue and earnings on Thursday, but net income slumped after a one-time charge as part of a tax decision in Europe. The stock fell as much as 2% in extended trading.
Apple boasts to investors that its sales from Services will grow alongside its installed base. After someone buys an iPhone, they’re likely to sign up for Apple’s subscriptions, use Safari to search Google, or buy an extended warranty.
Apple also cites a “subscription” figure that includes both its first-party services, such as Apple TV+ subscriptions, and users who sign up to be billed by an App Store app on a recurring basis.
The company said the installed base and subscriptions hit all-time-highs, but didn’t give updated figures. Apple said it had 2.2 billion active devices in February, and in August said it had topped 1 billion paid subscriptions.
Still, Apple faces questions about how long its services business can continue growing at such a rapid rate. Between 2016 and 2021, the unit sported significantly higher growth, reaching 27.3% at the end of that stretch.
In fiscal 2023, services growth dropped to 9.1% for the year, before recovering to about 13% the next year. Apple told investors that it expected services growth in the December quarter to be about what it was in fiscal 2024.
Cook was asked on Thursday what Apple could do to make some of its services and its Apple One subscription bundle grow faster.
“There’s lots of customers to try to convince to take advantage of it,” Cook said. “We’re going to continue investing in the services and adding new features. Whether it’s News+ or Music or Arcade, that’s what we’re going to do.”
WATCH: Apple has a big leg up in AI
Amazon CEO, Andy Jassy speaking with CNBC’s Jim Cramer on Mad Money in Seattle, WA. on Dec. 6th, 2023.
CNBC
Amazon CEO Andy Jassy is trying to reassure investors who may be worried about the future payoff of the company’s massive investments in generative artificial intelligence.
On a conference call with analysts following the company’s third-quarter earnings report on Thursday, Jassy pointed to the success of Amazon’s cloud computing business, Amazon Web Services, which has become a crucial profit engine despite the extreme costs associated with building data centers.
“I think we’ve proven over time that we can drive enough operating income and free cash flow to make this a very successful return on invested capital business,” Jassy said. “We expect the same thing will happen here with generative AI.”
Amazon spent $22.6 billion on property and equipment during the quarter, up 81% from the year before. Jassy said Amazon plans to spend $75 billion on capex in 2024 and expects an even higher number in 2025.
The jump in spending is primarily being driven by generative AI investments, Jassy said. The company is rushing to invest in data centers, networking gear and hardware to meet vast demand for the technology, which has exploded in popularity since OpenAI released its ChatGPT assistant almost two years ago.
“It is a really unusually large, maybe once-in-a-lifetime type of opportunity,” Jassy said. “And I think our customers, the business and our shareholders will feel good about this long term that we’re aggressively pursuing it.”
AI spending was a big topic on tech earnings calls this week. Meta on Wednesday raised its capital expenditures guidance, and CEO Mark Zuckerberg said he was “quite happy” with the team’s execution. Meanwhile, Microsoft‘s investment in OpenAI weighed on its fiscal first-quarter earnings released on Wednesday, and the company said capital spending would continue to rise. A day earlier, Alphabet CFO Anat Ashkenazi warned the company expects capital spending to grow in 2025.
Amazon has said its cloud unit has picked up more business from companies that need infrastructure to deploy generative AI models. It’s also launched several AI products for enterprises, third-party sellers on its marketplace and advertisers in recent months. The company is expected to announce a souped-up version of its Alexa voice assistant that incorporates generative AI, something Jassy said will arrive “in the near future.”
Amazon hasn’t disclosed its revenue from generative AI, but Jassy said Thursday it’s become a “multi-billion-dollar revenue run rate” business within AWS that “continues to grow at a triple-digit year-over-year percentage.”
“It’s growing more than three times faster at this stage of its evolution as AWS itself grew, and we felt like AWS grew pretty quickly,” he added.
Matt Garman, CEO of Amazon Web Services, speaks during The Wall Street Journal’s Tech Live conference in Laguna Beach, California, on Oct. 21, 2024.
Frederic J. Brown | AFP | Getty Images
Amazon said revenue in its cloud unit increased 19% in the third quarter, just missing analyst estimates.
Revenue at Amazon Web Services totaled $27.45 billion, according to a statement Thursday, while Wall Street was expecting $27.52 billion, based on StreetAccount estimates. Year-over-year growth has accelerated for five consecutive quarters.
The artificial intelligence portion of AWS is in the billions of dollars in annualized revenue, more than doubling year over year, Amazon CEO Andy Jassy, who previously led AWS, said on a call with analysts.
“I believe we have more demand than we could fulfill if we had even more capacity today,” Jassy said. “I think pretty much everyone today has less capacity than they have demand for, and it’s really primarily chips that are the area where companies could use more supply.”
AWS leads the cloud infrastructure market over Google and Microsoft and is an important source of profit for Amazon.
On Tuesday, Google parent Alphabet said revenue from Google Cloud, which includes cloud applications as well as infrastructure, totaled $11.35 billion, up 35%. Microsoft said Wednesday that revenue from Azure and other cloud services grew 33%.
AWS recorded $10.45 billion in operating income, representing 60% of its parent’s profit. Analysts expected $9.15 billion.
The unit’s operating margin came in at 38%, the widest for AWS since at least 2014. Google Cloud reported an operating margin of 17%.
“We’re being very measured in our hiring,” Brian Olsavsky, Amazon’s finance chief, said on the call.
During the quarter, Oracle said it will bring database services to AWS.
“If this is successful, we would love to find more pieces of their application stack that could run well in AWS and help customers do that,” AWS CEO Matt Garman told CNBC in a September interview.
Also in the quarter, AWS announced plans to discontinue some services, including code-repository tool CodeCommit. Garman told TechCrunch that AWS “can’t invest in everything.”
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