Super Micro Computer and Lumen Technologies have ridden the artificial intelligence wave to big gains this year.
The excitement behind artificial intelligence has driven the market to all-time highs. Any company that can tie its business to the future of artificial intelligence has seemingly done well, promising huge demand for its products or services from a new and untapped market.
But as valuations have soared, the short sellers have moved in, trying to find stocks that can’t live up to the promise or hype. Short sellers have honed in on the computer server and cloud provider Super Micro Computer (SMCI 2.25%) and the telecommunications company Lumen Technologies (LUMN 2.55%). Wall Street analysts are telling investors to sell one and hold the other. Let’s take a look.
Lumen Technologies: 38% implied downside
Lumen Technologies runs one of the largest interconnected fiber-optic cable companies, which powers high-speed internet, cable television, and phone services for consumers and businesses. Lumen’s stock has shot up about 250% this year, largely due to the belief that its fiber-optic network will serve as critical infrastructure in connecting data centers needed to power artificial intelligence. Lumen in August reported that demand for AI has led to $5 billion of new business.
However, short sellers like Kerrisdale Capital have started to doubt the company’s valuation and how much it can truly benefit from the AI boom. In late August, Kerrisdale, in a short report, suggested that buying into the AI hype around Lumen is premature and that the $5 billion of new business is “a desperate bid to raise cash amid deteriorating revenues and growing liquidity concerns.” Furthermore, Kerrisdale states that Lumen’s future sales opportunities do not include leading tech firms that are leveraging AI but are to older, more antiquated businesses still in discovery mode when it comes to AI.
Wall Street seems to agree with Kerrisdale. Of the eight analysts cited by TipRanks, zero are telling investors to buy the stock; there are five holds and three sell ratings. On Wall Street, this might as well be a sell rating. The average analyst price target is $4.09, which implies about 38% downside. I suspect some of these hold ratings are from firms that may have a business relationship with Lumen or want to keep the possibility open.
Lumen also has a high debt of close to $20 billion. While the company is trying to engineer a turnaround, given the stock’s big run and questions surrounding its role in AI, I would also avoid the stock until the company provides more evidence of sales related to AI.
Super Micro Computer: 34% implied upside
The computer server and storage maker Super Micro Computer is the most shorted stock in the S&P 500 (as of Oct. 21), with more than 21% of the company’s outstanding float sold short. The company has also benefited tremendously from AI because investors believe its products can be used as key infrastructure to store data that powers AI and machine learning. The stock has ripped 68% this year.
In late August, Hindenberg Research issued a short report, suggesting there is evidence of accounting malfeasance. The Securities and Exchange Commission charged Super Micro Computer with accounting violations in 2018 due to incorrect revenue recognition and understated expenses. Now, Hindenberg alleges that management and other employees have returned to incorrect accounting practices. The report says that three senior employees who left amid the scandal have been hired back.
According to TipRanks, three Wall Street analysts tell investors to buy the stock, 10 analysts recommend hold, and one suggests selling the stock. However, the average price target among them is $64, suggesting 34% upside from the current stock price.
Supermicro did delay the filing of its most recent annual report. However, CEO Charles Liang said in a filing the company doesn’t anticipate any material changes to its financials based on the work done so far. Liang also noted that the company created a committee to review internal controls and that he would address claims from the short report “in due course.”
Cases like this are risky because general investors will have difficulty obtaining or analyzing information needed to make a decision. While the company has potential, I wouldn’t recommend taking any significant position here until more is known, especially considering past violations.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
