AI Server Market Dynamics

During the whirlwind AI boom over the past two years, market watchers associate AI servers with NVIDIA (NASDAQ: NVDA) and Super Micro Computer (NASDAQ: SMCI). The two companies are closely linked: NVIDIA manufactures AI chips, while Super Micro produces AI servers.

Since ChatGPT redefined conversations on November 30, 2022, NVIDIA’s stock skyrocketed by 760%, while Super Micro’s peaked at over 1200%. However, recent events have placed the companies in contrasting situations.

Super Micro Under Scrutiny

On August 27, 2024, Hindenburg Research, a short-selling focused firm, released a report claiming Super Micro engaged in corporate malfeasance, including:
– Channel Stuffing: Inflating sales through deceptive practices.
– Related Party Transactions: Issues concerning suppliers Ablecom and Compuware, controlled by CEO Charles Liang’s relatives.
– Selling to Bad Actors: Notably selling tech components to Russia, with exports tripling since the start of the Ukraine invasion.

Competitors like Dell (NYSE: DELL) gained market share due to growing quality concerns about Super Micro.

Following the report, Super Micro’s stock plummeted by 19% and continued to decline. The company further delayed its 10-K filing for fiscal year 2024, which resulted in a non-compliance letter from Nasdaq, warning of potential delisting.

In a troubling twist, Ernst & Young, Super Micro’s auditor, resigned shortly after the report, citing concerns about governance and communication issues. Their resignation led to an additional 43% decline in Super Micro shares, leaving the stock down 50% since the report's release and 77% from its peak in March 2024.

NVIDIA’s Position

On the other hand, NVIDIA appeared relatively unaffected until recent developments. However, after the auditor’s resignation, NVIDIA’s stock dipped by nearly 4%. Analysts are questioning whether NVIDIA can distance itself from Super Micro amid rising concerns.

Mizuho’s analyst, Jordan Klein, suggested that NVIDIA might miss its own financial guidance if the situation at Super Micro escalates. He emphasized that Super Micro's negative working capital could hinder their capacity to fund operations, particularly for multi-million dollar systems requiring substantial GPU supply.

Klein observed that NVIDIA may need to shift most of its GPU supply away from Super Micro to other suppliers like Dell, mitigating risks in the mid-term. Still, uncertainties loom regarding potential payment delays or operational disruptions that could affect NVIDIA's immediate financial performance.

Despite Super Micro's turmoil, AI demand and competition in the race toward Artificial General Intelligence continue to thrive. BofA Securities projects a $280 billion AI accelerator market by 2027, with NVIDIA anticipated to capture 75% of the market, despite the challenges.

Conclusion

While NVIDIA has chosen not to comment publicly on Super Micro's issues, actions taken suggest a strategic distancing from the troubled company. As tension rises, questions circulate among customers and investors regarding potential impacts on NVIDIA’s performance.