Super Micro’s stock sinks 33% after co-founder’s indictment. Here are Wall Street’s biggest questions.
While Super Micro wasn’t named in a recently unsealed lawsuit, analysts say the charges raise concerns about credibility and controls
Super Micro Computer’s stock saw one of its biggest single-day drops in history on Friday, as Wall Street assessed the fallout of a co-founder’s indictment for alleged export-control violations.
While the server maker itself wasn’t named in a newly unsealed indictment, federal prosecutors have charged Wally Liaw, a Super Micro
co-founder and vice president of business development, with participation in a scheme that unlawfully diverted advanced Nvidia chips to China.Liaw resigned from Super Micro in 2018 after an accounting scandal, but was rehired as a full-time employee in 2022 and named to the company’s board of directors the next year.
The company announced after Friday’s closing bell that Liaw had resigned from the board. A day earlier, Super Micro said he had been put on administrative leave.
“It’s one thing being duped once by rogue employees (allegedly) committing crime right under your nose, but [it’s] quite another hiring the same person back (as a board director too) and later for that same person to (allegedly) do something worse like this,” Bernstein analyst Mark Newman wrote in a note to clients.
The indictment “raises serious credibility issues that could impact business,” he added.
Raymond James analyst Simon Leopold agreed that “the incident will reflect poorly on a company with a tarnished history.”
Super Micro shares fell 33% on Friday, in what was its second-steepest daily drop on record.
The company immediately tried to distance itself from the two employees and one contractor indicted by the U.S. government. “The conduct by these individuals alleged in the indictment is a contravention of the company’s policies and compliance controls, including efforts to circumvent applicable export control laws and regulations,” Super Micro said in a press release on Thursday.
The company “maintains a robust compliance program and is committed to full adherence to all applicable U.S. export and re-export control laws and regulations,” it added at the time.
Super Micro didn’t respond to a MarketWatch request for comment. MarketWatch was not immediately able to contact Liaw or other individuals named in the indictment.
Here are some of Wall Street’s biggest questions in the aftermath of the charges.
How deep does the problem go?
Liaw, along with fellow Super Micro employee Ruei-Tsang Chang and contractor Ting-Wei Sun, was accused of working with a company in Southeast Asia to order “large allocations” of the U.S. company’s servers, then supporting the “onward transshipment to China.”
The indictment alleges that the three arranged for servers valued at $2.5 billion to be illegally diverted. Prosecutors charge that the scheme involved using hair dryers to transfer serial numbers from real Super Micro servers to “dummy” versions to conceal from inspectors that the actual Super Micro servers were in China.
“The key question is whether this is an isolated case of ‘rogue employees’ or evidence of systemic compliance gaps inside [Super Micro’s] global sales and channel operations,” Bernstein’s Newman wrote.
The indictment “introduces a new legal/compliance overhang” for the company, Raymond James’s Leopold wrote. And Liaw’s status as a board member invites a more expansive list of reputation-related questions, he added.
The magnitude of the charges “may affect customer trust and supply chain relationships,” Leopold said, particularly with Nvidia and other U.S. hyperscalers and customers that are bound to comply with export controls.
Super Micro announced after Friday’s close that it had named DeAnna Luna its acting chief compliance officer. She is the company’s vice president of global trade and sanctions compliance.
Will Super Micro lose out on sales?
Newman wondered whether Nvidia will “feel the need to further distance” itself from Super Micro in the wake of the scandal.
If so, Super Micro could lose out on its supply of Nvidia graphics processing units, “which in turn could have devastating impact” on the server maker, Newman wrote.
Wedbush’s Matt Bryson also saw “room for concern as to how this
development might affect [Super Micro’s] business, including its relationships with suppliers and customers.”
Does Dell stand to gain?
Dell Technologies shares
were up more than 8% at session highs, but gave back most of their gains by the close. Still, analysts suggested the server company could capitalize on its rival’s struggles.
“Dell might be the most immediate beneficiary as Dell has emerged as the other significant supplier of AI servers/equipment to large non-hyperscale AI customers,” Bryson wrote.
He also flagged Cisco Systems
and Hewlett Packard Enterprise
as companies that could benefit if Super Micro sees its operations severely disrupted.
Did Nvidia know anything?
Nvidia’s stock fell more than 3% on Friday, though Bernstein’s Newman doesn’t think the company appears to have “any fault” in the alleged scheme involving Super Micro employees, he said.
See also: Nvidia’s stock chart just displayed a bearish signal. Is the AI star losing its shine?
“Nowhere” in the indictment “does it suggest that Nvidia had any knowledge or inkling as to what may have (allegedly) been going on, and we are confident that the company takes their responsibilities around the current export control regime extremely seriously,” Newman noted.
In a statement, an Nvidia spokesperson said: “Unlawful diversion of controlled U.S. computers to China is a losing proposition across the board.” The company “does not provide any service or support for such systems, and the enforcement mechanisms are rigorous and effective,” the spokesperson added.
