“HYPERSCALERS” OR “HYPERCHEATERS”? - ADDING HINDENBURG PIECE TO THE BIG PONZI PUZZLE WE HAVE BEEN PUTTING TOGETHER TILL NOW WHILE WAITING FOR NVIDIA EARNINGS

As as soon as Hindenburg Research’s (a famous short-selling hedge fund) piece “Super Micro: Fresh Evidence Of Accounting Manipulation, Sibling Self-Dealing And Sanctions Evasion At This AI High Flyer” was published I started to be flooded with notifications about it and when I picked up my phone, I have to be honest, I could not hold back a smile.

Here is what Hindenburg highlighted about Super Micro (SMCI) in its report:

Recent Evidence Of Channel Stuffing And Accounting Violations
Revenues “round-tripping” to inflate margins
Undisclosed Related Party Transactions
Evading Sanctions And Export Restrictions

I bet you are having a sense of “Deja’ Vu’”. Yes, this is exactly the same scheme we have been talking about for almost one year now and that has the duo NVIDIA-MICROSOFT at its center.

🚩 Evidence of channel stuffing and accounting violations

This is what I flagged in November last year in “$NVDA (PONZI) “LIES” UNDER $NVDA NOSE”:

“If NVIDIA is doing so well, why did their “Accounts Receivable” explode by a whopping 1,637% to 4.5bn$ in the same timeframe between 2022 and 2023 periods we are examining.

Isn’t it because you are selling things clients aren’t paying for?”

and

“If NVIDIA is doing so well, why did their inventory remain the same? When you sell so many goods and keep booking stellar future orders, there should be a physiological increase in inventory, right? Well, not in the case of NVIDIA apparently.”

Here is what Hindenburg highlighted in its report, not a secret, but giving it a closer look helps to understand the bigger picture:

“Super Micro has also been working on liquid cooling technologies for racks with higher energy AI workloads. [Slide 6] Investors have focused on its scale, vertical integration, relationship with Nvidia and quicker time to deliver than peers.[3] [1]”

I have a question at this point, why did Nvidia choose a while ago to partner first with SMCI, a little-known player in the space that was already caught cheating by the SEC, rather than larger ones like Dell, HP, or Seagate? Let’s not be so naïve to think that because NVIDIA and SMCI CEOs are Taiwanese the bigger brother wanted to help out its little one. Putting my research and Hindenburg one together it doesn’t take long to understand that NVIDIA needed a buddy that was accustomed to the shady practice of channel stuffing like them. Imagine claiming to deliver thousands and thousands of GPUs without an infrastructure that could support them at least in theory…

In February this year in “IS $NVDA CURRENTLY EMPLOYING THE SAME ACCOUNTING TRICK TO INFLATE ITS MARGINS IT WAS PREVIOUSLY CAUGHT USING DURING THE DOT-COM BUBBLE?” I tried to bring the focus on a strange coincidence (euphemism) between what NVIDIA was doing in the early 2000s and today. In both instances, the company recorded a sharp increase in revenues, and oddly high margins, but did not show any sign of an increase in expenses toward its suppliers, especially TSMC, to whom the company delegates 100% of its GPU production. In a few hours NVIDIA is going to report earnings and it will be very interesting to see whether TSMC’s sharp increase in revenues will be duly accounted for in its cost base this time and trigger a sharp sell-off in the stock due to now lower margins than what investors have been accustomed to (exactly like in the early 2000)

What did Hindenburg uncover about SMCI?

2018: “An SEC order stated the company “improperly accelerated revenue recognition and reporting” in multiple ways, including recognizing revenue before delivering goods, sending goods before specified delivery dates, sending incomplete and mis-assembled goods to customers and improperly changing shipment terms, among other methods”

Today: “An April 2024 lawsuit, brought by the former Head of Global Services, Bob Luong, alleges that Super Micro has continued to engage in falsified revenue recognition after being relisted in 2020.

The complaint specifically alleges, among other issues, that:

Revenue was incorrectly allocated to hardware sales rather than service, in the quarter ending December 2020, to artificially boost reported profit margins.
Revenue was prematurely booked even when equipment could not be delivered to and installed for customers.
Revenue was prematurely booked even when products were faulty or not ready for sale”

So, isn’t “accelerated revenues recognition” the exact same thing both SMCI and NVIDIA are doing? Of course, it is, perhaps because they sit exactly on the same boat.

🚩 Revenues “round-tripping” to inflate margins

This time let’s have a look first at the Hindenburg piece:

“Circular Related Party Relationship: Super Micro Provides Components To Ablecom and Compuware, Who Simply Assemble Them And Sell Them Back To Super Micro

Ablecom was founded in 1997, per its website. Its CEO and largest shareholder is Steve (Jianfa) Liang, a younger brother of Super Micro’s CEO Charles Liang, per the company’s 2023 annual report. Steve Liang owns 28.8% of Ablecom shares along with unnamed “other family members”. Super Micro CEO Charles Liang, and his wife, who also is a director at Super Micro, own 10.5% of Ablecom shares. An unnamed sibling of co-founder Wally Liaw owns 11.7%, per filings.[8] [9]
Compuware was founded in 2004, per its website. Its CEO is Bill (Jianda) Liang, also a younger brother of Super Micro’s CEO, per the company’s 2023 10-K. Brother Steve Liang (mentioned above) is also a director and shareholder of Compuware.[10] [11]
Export Records Show ~99.8% Of Ablecom´s Exports To The U.S. Since 2020 Were To Super Micro
Export Records Show ~99.7% Of Compuware´s Exports To The U.S. Since 2020 Were To Super Micro”

Yes, my dear readers, true not exactly the same and on a different scale, but isn’t NVIDIA engaged in a revenues round-tripping scheme, with Microsoft as its major counterpart, as well? Yes it is:

🚩 Undisclosed Related Party Transactions

Again let’s borrow from Hindenburg Research first:

“In February 2024, Super Micro Made An Undisclosed Investment In Tech Startup Lambda Labs As Part Of Its $320 Million Funding Round. Lambda’s CEO Publicly Claimed One Purpose Of Its Funding Was To Buy “Lots Of Nvidia GPUs”, but A Former Lambda Leader Told Us – I’ve Never Heard Of Them [Lambda] Using Anyone Else But Super Micro -”

Let’s have a look at what I highlighted before in “MELLANOX, THE CORNERSTONE OF NVIDIA-MICROSOFT REVENUES ROUND-TRIPPING SCHEME”:

“Do you see what I am seeing here? Yes, 10 years later Mellanox, today part of Nvidia, and #Microsoft are doing the exact same thing. However, in order to make sure the house of cards does not collapse, both companies this time are replicating the same trick many times to make sure the round-tripping does not stop. How are they doing it? Very simple, they keep investing in Startup companies at inflated prices with the requirement those operate on the Mellanox-Nvidia infrastructure Azure is being built upon (Microsoft, Nvidia Lead In Investing In AI Startups, But Others Close Behind). How can these companies pay for Microsoft Azure if they can barely generate revenues and have limited cash resources? A good chunk of Microsoft investments is in reality Azure Credits (OpenAI has received just a fraction of Microsoft’s $10 billion investment)”.

However, Nvidia needs to be careful because similar to 2008 when Magnetar Capital first blew the CDO bubble with the sole purpose of betting against its collapse, something similar is happening today (”IS MAGNETAR CAPITAL BLOWING AIR INTO THE NVIDIA (PONZI) SCHEME SO THEY CAN BET ON ITS IMPLOSION?”).

🚩 Evading Sanctions And Export Restrictions

This is what the Wall Street Journal just published “China’s AI Engineers Are Secretly Accessing Banned Nvidia Chips” with a small 3 months delay since I published “THE DARK CORNERS OF NVIDIA 10-Q REVEAL THE EXTENT OF THE NVIDIA FRAUD”. What did we discover 3 months ago?

“Please have a look at these two sentences below, of course, placed far away from each other in the Nvidia 10-Q:

“Two indirect customers each represented 10% or more of total revenue for the first quarter of the fiscal year 2025; one of these indirect customers purchased our products primarily through direct Customer B. Both were attributable to the Compute & Networking segment.”

“Sales to one direct customer, Customer A, represented 13% of total revenue and sales to a second direct customer, Customer B, represented 11% of total revenue for the first quarter of the fiscal year 2025, both of which were attributable to the Compute & Networking segment. No customer represented 10% or more of total revenue for the first quarter of fiscal year 2024.”

Do you notice anything strange? Let me help you.

“Customer B, represented 11% of total revenue for the first quarter of fiscal year 2025.”
“One of these indirect customers purchased our products primarily through direct Customer B.”
“Two indirect customers each represented 10% or more of total revenue for the first quarter of fiscal year 2025.”

Yes… All the stock from Customer B is then totally sold to an anonymous “indirect” Customer C.

Wait a minute, why the need for such an arrangement? What’s wrong with Nvidia selling directly to customer C? Here we have two options:

Nvidia needs to circumvent US Government sanctions and/or;
Customer C is borrowing (likely from Customer B) to purchase Nvidia GPUs.

Why does Nvidia need a scheme to circumvent US sanctions? According to them: “our inability to sell to a customer due to U.S. or other countries’ trade restrictions or any difficulties in collecting accounts receivable would likely harm our financial condition and results of operations.” Is that also the reason why such a big company (on paper) is so reliant on “channel partners” to the point this deserves mention in their risk disclosures? “With several of these channel partners, we are selling multiple products and systems in our portfolio through their channels.

Option 2 does not come out of my fantasy either, but directly from Nvidia’s disclosures: “If end demand increases or our finished goods supply availability is concentrated near a quarter end, the system integrators, distributors, and channel partners may have limited ability to increase their credit, which could impact the timing and amount of our revenue.”

Considering what NVIDIA itself writes shortly after in its own 10-Q and highlighted in the same article, the biggest reason of the above scheme seems to be evading sanctions:

“In addition, geopolitical tensions, such as those involving Taiwan and China, which comprise a significant portion of our revenue and where we have suppliers, contract manufacturers, and assembly partners who are critical to our supply continuity, could have a material adverse impact on us.”
“For example, most of the shipments associated with Singapore revenue went to either the United States or Taiwan in the first quarter of fiscal year 2025.” [Wait, what?! Most of the GPUs that are “sold” to Singapore are then shipped out back to Taiwan and the US?]
[Well, the company itself acknowledges the existence of an “unauthorized gray market,” because, of course, calling it a “black market” would have made it sound too obvious, I guess.]“In general, our new products or previously sold products may be resold online or on the unauthorized “gray market,” which also makes demand forecasting difficult. Gray market products and reseller marketplaces compete with our new products and distribution channels.”
At this point it is fair to ask, is Taiwan the center of a big “unauthorized gray market” for Nvidia products (and, clearly, the company knows about it)? If the answer is “Yes,” the numbers start to make sense.

What does Hindenburg claim SMCI is doing at the same time?

2006: “before Super Micro was listed, it pleaded guilty to one felony count of exporting computer components to Iran in 2001 and 2002 in violation of U.S. export bans. It was fined $150,000.”

Today:

“Super Micro publishes an export control policy on its website but, as of mid-August 2024, had not updated the document since 2020 despite fast-changing regulations. It includes neither Russia nor China in the list of countries currently under U.S. sanctions or heightened scrutiny.[35]”
“But Super Micro products have been shipped to Russia in larger-than-ever volumes since the invasion of Ukraine, based on our analysis of more than 45,000 import and export transactions provided by trade aggregator Tradesparq.[39] [40]”
“Prior to the war, between January 1st, 2020, and February 23rd, 2022 – the last date Super Micro said it booked revenue for Russia sales – $60.7 million of Super Micro products were exported to Russia either directly by Super Micro or by third-party exporters, per available Tradesparq data.[43]. After the invasion of Ukraine, between February 24th, 2022, and to June 30th, 2024- the end of Super Micro’s fiscal year – the export of Super Micro products to Russia spiked. Approximately $210 million of Super Micro products were shipped to Russia in that period – in apparent contravention of U.S. export bans – per Tradesparq.”
“Super Micro appears to have ceased direct exports, as disclosed. However, 10 third-party exporters handled two-thirds of the shipments to Russia and more than 220 other entities – 3x more than pre-invasion – handled the remainder, per Tradesparq. The largest exporters were based in Turkey, China and the UAE – all transshipment countries identified by the U.S. government.[44] The export values are based on declared customs value. The actual revenue generated for Super Micro or intermediaries may have been multiples higher, given that technology prices in Russia are being boosted by scarcity amid heavy sanctions and price gouging via black-market supply routes, per NATO.[45]”
“In calendar year 2023, exports of Super Micro products to Russia rose to $126.6 million – 9.6x higher than in 2021 – per Tradesparq data. That value was equivalent to 4.9% of Super Micro´s total worldwide sales, excluding the U.S., in calendar 2023, per filings. [1, 2, 3, 4] [47]”
“At Least 46 Companies That Handled Super Micro Products To Russia Are Now Under OFAC Sanctions Or On U.S. Government Watchlists”

I believe it is enough to understand how there is an active effort by the semiconductor sector to circumvent sanctions.

To conclude, similar to what happened during the DotCom bubble, it is clear we are in front of a broad industry effort to cheat on many fronts with the sole purpose of goosing valuations to nosebleed and unrealistic levels never seen before and “AI” has been the excuse to perpetrate this since the very beginning like “internet” was 20 years ago as I summarized in: “IT HAS NEVER BEEN A BUBBLE IN AI, BUT A PONZI SCHEME IN SEMICONDUCTOR STOCKS SINCE THE VERY BEGINNING”.

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