It's been more than a year and a half since Super Micro Computer (SMCI) , a member of my 2018 Double Net Value Portfolio, was embroiled in a controversy involving the potential manipulation of hardware. At that time an unidentified U.S. telecommunication company allegedly discovered the compromised hardware in August of 2018. A Super Micro Computer product contained sabotaged chips intended to spy on U.S. companies, according to Bloomberg Businessweek. That shocking "news" sent shares to about $12 in October 2018, a 50% drop since the prior June. I was reluctant at the time to take a flyer on the name, given the potential severity of the allegations. The story itself was ultimately met with skepticism, and then all but died fairly quickly.
Meanwhile, SMCI shares recovered, took a hit along with many other companies in March as the pandemic reared its ugly head, and is once again back at pre-controversy levels. It has also recently returned to double-net land (stocks trading at between 1x and 2x net current asset value or NCAV), and is currently trading at 1.98x NCAV. With a $1.4 billion market cap, it is currently the second largest double-net behind $2.6 billion Avnet (AVT) , which was a member of my 2019 Double Net Value Portfolio, and has itself recently returned to double-net land.
SMCI's balance sheet looks solid which is fairly typical among double-nets. The company ended its latest quarter with $301 million, or $5.84 per share in cash, and just $33 million in debt. Shares currently trade at just under 13x 2021 consensus earnings estimates, and less than 10x the 2022 "consensus". Keep in mind that just two analysts currently cover the name, and the 2022 "consensus" includes just one analyst estimate.
The company blew away third quarter estimates, released on May 7th, reporting earnings per share of 84 cents, well ahead of the 35 cent consensus estimates. That, interestingly, was the company's first earnings surprise in the past seven quarters.
Last month SMCI announced that it is considering opening a new assembly plant in the U.S., either in Oregon, the East Coast or Midwest. Currently, the company assembles about half of its servers in Taiwan and half at company headquarters in San Jose.
As a sometimes "dumpster-diver", I will look for situations where names appear to have been beaten up well beyond what they deserve. In the case of SMCI, however, the reported situation was one I did not want to touch. A large, well respected news outlet published a scathing story, creating a potential nightmare situation. But it just goes to show you, you can't believe everything you read, no matter how respectable the source may appear.
