Finding Asymmetry in Chaos: $SMCI’s Turnaround Play
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It's 9:30 PM, and I'm rushing a bit because I'm tired, so this is just going to be a rough overview of my thoughts—but $SMCI is shaping up to be something truly special. As of today (November 14th, 2024), I’m officially long on it and have structured my position in some unique ways. It's a "Texas-Hedge" to say the least...
Of course, we need to weigh the risks. But before diving into that, it’s crucial to understand why $SMCI has fallen off a cliff from $122.90 (split-adjusted) on March 8 of this year to $17.70 as of today.
Here are the recent headlines:
August 27, 2024: Hindenburg Research published a report alleging "glaring accounting red flags.
August 28, 2024: Following the Hindenburg report, Super Micro announced a delaying in filing its annual report.
September 26, 2024: The Wall Street Journal reported that the DOJ had initiated an investigation into Super Micro's accounting practices.
October 30, 2024: Ernst & Young (EY), Super Micro's auditing firm, resigned, expressing concerns about the company's financial controls and governance.
November 1, 2024: Reports highlighted that Super Micro's CEO, Charles Liang, has close family ties with major suppliers, raising concerns about potential conflicts of interest and governance issues.
November 4, 2024: Analysts suggested that Super Micro might face delisting from the Nasdaq exchange due to ongoing accounting issues and delays in filing its annual report. (seems like a stretch?)
November 13th, 2024: told regulators that it will be unable to file its quarterly report for the period ended Sept. 30 (if you listened to their earnings call, they mentioned they will be doing their best to file an extension)
Okay, now that we’ve covered the headlines, let’s break this down logically.
Earlier this year, $SMCI was the AI darling, sitting alongside $NVDA as one of the market’s favorites. They even grew large enough to meet the requirements for inclusion in the S&P 500—a major milestone.
On top of that, $SMCI has substantial revenue. For the fiscal year ending June 30, 2024, Super Micro Computer reported $14.94 billion in annual revenue, with an impressive growth rate of 109.77%.
Now, did their auditor leave? Yes. Does this happen more often than people realize? Also yes. Unfortunately, many are comparing this to Enron, which is just one infamous example out of thousands. Auditor-client disagreements happen all the time, and sometimes one party just doesn’t want the public relations headache of being associated with the other, even if nothing is fundamentally wrong. That’s just how the corporate world operates.
But let’s dig into some "rough" probabilities - you must put your own values on them.
I personally estimate the chance of $SMCI being a 0 at about a 5% chance (though realistically, I think it’s closer to 1-2%). Even with that risk, I believe that if they secure an extension and file their 10-Q (if you listened to their earnings call, they said this was the plan)—cleaning up the current mess—the stock could rally a minimum of 30% from current levels. Realistically, I see $45-$50 in the cards. From the low $18 range (where I'm currently involved from), that’s a potential upside of 32 points against 18-points of downside (with only a 1-5% chance of that downside actually materializing). - that is what we call Asymmetry.
However, we also need to factor in the likelihood of "forced selling". If they don't get the extension (deadline is November 16th, but really it's the 15th since it's Friday), there’s a high probability that index funds will have to remove them (even with the extension, they still might need to be removed), creating further downward pressure. If this cascades into a NASDAQ delisting, the move to the OTC market would accelerate selling even more as funds and firms rush to the exit (many just can't hold OTC's). Ironically, this could present the biggest opportunity of all. If we see a capitulation event triggered by a NASDAQ delisting, buying in the OTC market could be the mother of all opps! In fact, I’d love for that to happen.
But for now, I'm quite content with being involved at these prices. And while I wouldn’t complain if we just trended up from here, my ideal scenario is a continued sell-off that sets up the "mother of all capitulation trades."
Of course, you have to weigh the risks. I personally put the chance of fraud and a complete zero at 1-5%, but others might feel differently. That’s what makes a market. With 30+ points of potential upside (where I think the "mean" is around) against 18 points of downside (with only a slim chance of materializing), the risk/reward is just too compelling for me to pass up.
One thing I’d prefer is if the enterprise value was a bit lower, as that would open the door to takeover talk. But realistically, that’s unlikely in a hot sector like AI—even with the challenges $SMCI is facing.
Overall, I’m feeling really good about this opp and hopeful it turns out well.
As always, people see things differently.
Apologies for the roughness of this post—hopefully, it made sense despite the lack of polish!
Don't forget, if the story changes, I'll change
I am going to leave the idea with that. I covered just about everything I wanted, but I'm happy to chat about it more via email - kylevallans@gmail.com
Disclaimer: The content shared on this blog is based on my personal opinions and is intended for informational purposes only. It should not be taken as financial advice. Please conduct your own research or consult with a financial professional before making any investment decisions.
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