Short selling is a dangerous game now playing out in at least one company riding the tsunami of demand driven by AI chatbots like ChatGPT.
The company in question is Super Micro Computer — the San Jose, Calif.-based maker of Generative AI servers and liquid cooling products — whose stock is in the middle of a war between investors betting the stock will plunge and the bulls who have enjoyed the stock’s 768% rise in the year ending February 20, according to Bloomberg.
On February 23, the short sellers — 10.58% of Super Micro’s float is sold short, according to the Wall Street Journal — won a skirmish in this battle. That is when Super Micro stock plunged 20%, noted Bloomberg.
The reason for the plunge may have been the company’s pricing a $1.5 billion capital raise — that will dilute existing shareholders — to be used for “growth and business expansion,” reported Yahoo! Finance.
However, short-sellers are going to lose the war. After all, raising capital after a company’s stock reaches an all-time high seems like a good idea — especially if the company has a good use for those funds.
Here are three reasons Super Micro stock could rise further:
- Nvidia buys servers from Super Micro.
- Super Micro’s liquid cooling products are in demand for training and operating large language models.
- Super Micro’s financial performance and prospects are outstanding.
To be fair, short sellers are taking this risky bet for a reason. Super Micro’s stock chart reveals a nearly vertical upward movement since the start of 2024. Short-sellers have been fueling the ascension of the company’s shares when brokers require them to buy the stock to cover their underwater bets.
What’s more, the 20% fall in Super Micro made short sellers $1.2 billion in profit (after they suffered $4.8 billion in losses since February 2023, according to data from S3 Partners featured in a Bloomberg report.
As long as Super Micro achieves expectations-beating growth, its business will keep putting those short-sellers on edge.
Nvidia Buys Servers From Super Micro
Nvidia is arguably one of the world’s top performing companies right now. As I wrote last week, Nvidia revenue grew 265% in the most recent quarter while earning a 57% net margin and the AI chip designer forecast 300% growth for the current quarter.
So it stands to reason that an Nvidia supplier would be a beneficiary of the chip designer’s success. Super Micro — which collaborated with Nvidia to make AI servers servers and workstations supporting the chip designer’s H100 GPUs — is the third-largest server provider with 5% market share, according to MoneyControl.
Charles Liang, Super Micro CEO, immigrated to the U.S. from Taiwan as did Nvidia CEO Jensen Huang. Liang founded Super Micro in 1993 and has been collaborating with Nvidia for more than 30 years, according to CRN.
This long-standing partnership bodes well for Super Micro’s future. “Whatever Nvidia develops, we pretty much sync up with them,” Liang told CRN. “And that’s another reason why, whenever they have a new product out, we have a new product available quicker than our competitors do,” he added.
Super Micro’s Liquid Cooling Products Are In Demand
Data centers generate huge amounts of heat. One way to cool of those data centers is to operate air conditioners. A better way to cool them is through liquid cooling.
A leading provider of liquid cooling systems is Vertiv — about which I wrote in December. In 2023, Vertiv was a major beneficiary of data centers’ need to cool off the GPU-laden computing systems used to train and operate LLMs.
As Bank of America analyst Andrew Obin wrote in a June 2023 report, a 10% increase in power use would require “a more than 10% increase in electrical-equipment capacity because of the need for redundant infrastructure to help guard against power failures,” Bloomberg reported.
Higher power means more heat generated – creating demand for equipment to cool down the servers to ambient temperature. Vertiv’s liquid cooling systems solved the problem of overheated data centers very effectively. In June 2023, Vertiv was struggling to satisfy demand for its products from data centers processing Generative AI workloads.
About a third of Vertiv’s revenue came from hyperscale data-center customers – considerably higher than the single-digit percentages at larger rivals such as Eaton and Schneider, noted Obin.
Super Micro also offers liquid cooling systems for data centers. Rosenblatt Securities — which boosted its price target on the company to $1,300 from $700 — expects Super Micro to increase its market share from single digits to “double digits in the next few years with a special emphasis on enterprise solutions,” Rosenblatt analyst Hans Mosesmann wrote in a note featured by Bloomberg.
He added, “A pivotal factor in Supermicro’s growth trajectory is the adoption of liquid cooling technology, a critical development for overcoming challenges in cloud computing at scale in AI.”
Super Micro’s Excellent Performance And Prospects
Super Micro — whose stock has soared 195% in 2024 — reported expectations-beating results and raised guidance in its most recent quarter.
Here are the key numbers for Super Micro’s quarter ending December 2023:
- Q1 FY 2024 revenue: $3.66 billion — up 103% from the year before and $860 million more than the FactSet consensus, according to TheStreet.com.
- Q1 FY 2024 earnings per share: $5.59 — up 71% from the year before and 45 cents per share more than the FactSet consensus, noted TheStreet.com.
- FY 2024 revenue guidance: $14.5 billion — about 40% more than the previous guidance of $10.5 billion, TheStreet.com reported.
Super Micro — 50% of whose revenue comes from AI, noted CRN — was exuberant about the results. “Finally, we are entering an accelerating demand phase now from many more customer wins,” Jiang told investors according to the earnings call transcript.
He added, “Overall, I feel very confident that this AI boom will continue for another many quarters if not many years. And together with the related inferencing and other computing eco system requirements, demand can last for even many decades to come, we may call this an AI revolution.”
One analyst — Barclays’ George Wang — raised his price target on Super Micro 74% to $691 a share. “AI demand is still outstripping supply,” Wang wrote in a research note featured by TheStreet.com.
“Once supply fully normalizes in next quarters, demand pipeline and expanded capacity support $25 billion-$30 billion in revenue over the next 2-3 years, vs. Dec Q annualized run rate of $15 billion,” Wang added.
He said “a potential heat dissipation upgrade from air to liquid cooling could be another key transformation in data center design, which could benefit Supermicro,” reported TheStreet.com.
With Super Micro shares trading about 20% below their peak, the market could be offering investors a good entry point.