SMCI - Super Micro

[pcm983]

Seems like a long here. Also potential lawsuit against bberg.

 

https://risky.biz/RB517_feature/

 

[atbed]

https://www.bloomberg.com/news/articles/2018-10-09/new-evidence-of-hacked-supermicro-hardware-found-in-u-s-telecom?srnd=premium

[hillfronter83]

https://www.bloomberg.com/news/articles/2018-10-09/new-evidence-of-hacked-supermicro-hardware-found-in-u-s-telecom?srnd=premium

 

 

“Bloomberg's technically clueless journalists” is what i thought.

[Foreign Tuffett]

Was feeling pretty smug yesterday until I realized that Bloomberg had publisher another "spy chip" article, which (again) crashed the stock.  :P

 

Nibbled a little more @ $12.15 yesterday, only to sell that nibble today @ $12.85. Still hold the bulk of my position.

 

As hilfronter83 pointed out, several hardware security professionals on Twitter are quite skeptical about many of the substantive claims made in the Bloomberg articles. I don't have the technical expertise to have a much of an opinion, but do think it's odd that no picture of a spy chip has surfaced.

 

 

 

 

 

[oddballstocks]

Was feeling pretty smug yesterday until I realized that Bloomberg had publisher another "spy chip" article, which (again) crashed the stock.  :P

 

Nibbled a little more @ $12.15 yesterday, only to sell that nibble today @ $12.85. Still hold the bulk of my position.

 

As hilfronter83 pointed out, several hardware security professionals on Twitter are quite skeptical about many of the substantive claims made in the Bloomberg articles. I don't have the technical expertise to have a much of an opinion, but do think it's odd that no picture of a spy chip has surfaced.

 

Why would it be odd?  How does a picture do much?  It's a small thing that looks like a capacitor.  My guess is if someone posted a picture people would still say "but it just looks like a chip, we don't know it's real."

 

I don't know if this exact story is real, but the NSA has chips and spies with this sort of hardware.  Technically the functionality exists, that's not a stretch.

 

I remember back in 2000/2001 on the underground of the internet there was a lot of rumbling about the NSA being able to tap lines and record all traffic.  It was a rumor, there were some data points, but it was all rumor level.  Very similar to this.  Then suddenly Snowden released his cache and validated those claims.  More than ten years later those rumors were proved to be very accurate.

 

This story has a lot of similarities.  It's plausible, we know the US does it, so why wouldn't China, and there are weird rumors.  Apple started to build their own servers in 2015 to avoid hardware security issues.  Then Apple cut off SuperMicro in 2017.  I mean it could all be coincidence, or it could be accurate.

 

As to this having an impact? I'd suggest reading some of the SysAdmin reddits or forums.  There is skepticism on all levels.  I've seen a lot of "to be safe we're just going to go with someone else" type posts.  I don't know if that trickles down into future earnings or what.

 

I love net-nets and I love depressed stocks.  But you don't buy as the knife is falling.  You wait until they've had three or four bad quarters, they've cleaned things up, and the market still doesn't care.  That's when you buy.  If I miss out, then oh well.  But buying here seems really risky verses waiting for things to settle some.

[Foreign Tuffett]

Was feeling pretty smug yesterday until I realized that Bloomberg had publisher another "spy chip" article, which (again) crashed the stock.  :P

 

Nibbled a little more @ $12.15 yesterday, only to sell that nibble today @ $12.85. Still hold the bulk of my position.

 

As hilfronter83 pointed out, several hardware security professionals on Twitter are quite skeptical about many of the substantive claims made in the Bloomberg articles. I don't have the technical expertise to have a much of an opinion, but do think it's odd that no picture of a spy chip has surfaced.

 

Why would it be odd?  How does a picture do much?  It's a small thing that looks like a capacitor.  My guess is if someone posted a picture people would still say "but it just looks like a chip, we don't know it's real."

 

I don't know if this exact story is real, but the NSA has chips and spies with this sort of hardware.  Technically the functionality exists, that's not a stretch.

 

I remember back in 2000/2001 on the underground of the internet there was a lot of rumbling about the NSA being able to tap lines and record all traffic.  It was a rumor, there were some data points, but it was all rumor level.  Very similar to this.  Then suddenly Snowden released his cache and validated those claims.  More than ten years later those rumors were proved to be very accurate.

 

This story has a lot of similarities.  It's plausible, we know the US does it, so why wouldn't China, and there are weird rumors.  Apple started to build their own servers in 2015 to avoid hardware security issues.  Then Apple cut off SuperMicro in 2017.  I mean it could all be coincidence, or it could be accurate.

 

As to this having an impact? I'd suggest reading some of the SysAdmin reddits or forums.  There is skepticism on all levels.  I've seen a lot of "to be safe we're just going to go with someone else" type posts.  I don't know if that trickles down into future earnings or what.

 

I love net-nets and I love depressed stocks.  But you don't buy as the knife is falling.  You wait until they've had three or four bad quarters, they've cleaned things up, and the market still doesn't care.  That's when you buy.  If I miss out, then oh well.  But buying here seems really risky verses waiting for things to settle some.

 

I'm more of a "buy when there's blood in the streets" investor. I don't pay attention to technical factors "falling knife, etc) whatsoever. Instead, I'm looking to get the best entry price possible.

 

Some of my best investments have been situations where investors are indiscriminately selling because of massive uncertainty. Why? Probably because value is most likely to be found in situations where investors are selling first and asking questions later.

[Liberty]

The last part of this podcast (the last 20 mins? Not sure, just estimating, I didn't look at the timer) talk about the supposed chinese hack at supermicro:

 

https://daringfireball.net/thetalkshow/2018/10/16/ep-231

 

Their theory is the one that sounds most plausible to me. It's a bogus story, probably created by government people as a psyops operation to tilt public opinion in the trade war with China.

 

Otherwise, a lot of the technical things in the story are fishy, and the fact that with thousands of boards out there no security expert has yet come out with proof seems very suspicious.

 

Of course it doesn't mean that there isn't all kinds of spying going on, but this specific story seems bogus.

 

But it's just a theory, since it's hard to prove a negative...

[Spekulatius]

Impossible to prove a negative of course, but if these motherboards with Trojan horse hardware existed in any quantity, they would have shown up already, now that people look more closely. Plus there are reports that state that the Super Micro boards are so crappy, that they could easily be hacked with laced software and there isn’t even a need for a hardware Trojan horse.

[given2invest]

Impossible to prove a negative of course, but if these motherboards with Trojan horse hardware existed in any quantity, they would have shown up already, now that people look more closely. Plus there are reports that state that the Super Micro boards are so crappy, that they could easily be hacked with laced software and there isn’t even a need for a hardware Trojan horse.

 

lol is that a bull case?  their products are shit?  haha

[Liberty]

Impossible to prove a negative of course, but if these motherboards with Trojan horse hardware existed in any quantity, they would have shown up already, now that people look more closely. Plus there are reports that state that the Super Micro boards are so crappy, that they could easily be hacked with laced software and there isn’t even a need for a hardware Trojan horse.

 

lol is that a bull case?  their products are shit?  haha

 

It's only funny because it's sad: Everybody's products are shit. How many bug patches and security vulnerabilities are all of the big software and hardware vendors constantly patching with OS/app/firmware updates?

 

I don't know if Supermicro's worse than anyone else, I haven't followed them except for the alleged hack story, but I know that security is extremely hard, especially if it's not designed from the ground up and part of the culture at the manufacturer (which is why Apple does pretty well -- they've made it a priority for a long time).

[oddballstocks]

 

lol is that a bull case?  their products are shit?  haha

 

It's only funny because it's sad: Everybody's products are shit. How many bug patches and security vulnerabilities are all of the big software and hardware vendors constantly patching with OS/app/firmware updates?

 

I don't know if Supermicro's worse than anyone else, I haven't followed them except for the alleged hack story, but I know that security is extremely hard, especially if it's not designed from the ground up and part of the culture at the manufacturer (which is why Apple does pretty well -- they've made it a priority for a long time).

 

Their products are worse.  When you buy enterprise hardware you expect it to last a LONG time with intensive use.  For example, a Samsung SSD can handle about 400TBW, terrabytes written.  Once you write 400TB the NAND wears out and you need a new drive.  For most users this amount of data is inconceivable.

 

Take an Intel SSD, the average ones can handle 1 drive write per day, so 1TBW per day, or 2PB (petabytes) written over five years, that's 5x longer.  That's the low end, their write intensive units can handle 10 drive writes per day, so 10TBW a day or 18PBW in five years, 45x longer.

 

Intel guarantees their flash, it's warrantied, and if you don't hit these metrics you can RMA the devices. That is an example of enterprise reliability and engineering. Gear like Cisco, HPE, Dell (some), Juniper, Arista are in this category. The stuff just runs, it runs forever and keeps running.  The manufacturers stand by their products and have insane warranties.  I have some four hour response warranties on some Cisco gear.  This means that a Cisco engineer will be at the server in person replacing parts (at no charge to me) within four hours no matter what time or day of the week.

 

When people mention Super Micro it's always coupled with "it's cheap" and it's so cheap the recommendation is to buy two of everything.  This is so when the first one fails you have a ready replacement.  In most cases two servers are cheaper than some of the name brand servers above.  The catch is your people are the ones out of bed on Christmas Eve swapping servers.

 

Is there a place for this? Sure. Just like people get away with using Samsung SSD's in enterprise environments.  If your workload isn't as intense and you have extras on hand then buying cheap makes sense.

 

There are a LOT of small businesses out there where IT is a cost center starving for funds. These guys will buy Super Micro and deal with the quality because that's all they can get. These are the same companies that are on Windows XP or Server 2008.

 

They're the ultimate white box supplier.

 

Search reddit/r/sysadmin for Super Micro.  First two hits:

 

People are recommending that Super Micro is good if when a server has an issue you can just throw it away and replace it with another.  One guy claims "for a lab environment they're better than nothing."  :o

 

There are thread after thread like this.  People pleading with others to buy anything but SM unless they can afford rooms full and don't care about reliability, or they don't have a budget.

 

I'm not trying to slam them. I've been looking at this from the investment angle too.

 

There's a second trend that I've noticed that I never appreciated.  Super Micro really benefitted from the inexpensive array of cheap compute notes theory of data centers.  This is what Google pioneered, a ton of cheap commodity machines you throw away as they die.  But with virtualization we've moved to extremely reliable overbuilt hosts for VM's.  AWS is selling virtualization on big machines, a lot of them. The theory is now you have a number of VM's spread across a few nodes orchestrated by Kubernetes.

 

[Spekulatius]

Impossible to prove a negative of course, but if these motherboards with Trojan horse hardware existed in any quantity, they would have shown up already, now that people look more closely. Plus there are reports that state that the Super Micro boards are so crappy, that they could easily be hacked with laced software and there isn’t even a need for a hardware Trojan horse.

 

lol is that a bull case?  their products are shit?  haha

 

In a roundabout way, the answer is yes.

[writser]

There's a second trend that I've noticed that I never appreciated.  Super Micro really benefitted from the inexpensive array of cheap compute notes theory of data centers.  This is what Google pioneered, a ton of cheap commodity machines you throw away as they die. But with virtualization we've moved to extremely reliable overbuilt hosts for VM's.

 

I highly doubt that. What's your source for this? Software eats the world. Eventually everything will run on commoditized hardware because at large scales it will always be cheaper to implement redundancy in software than in hardware. Google / Amazon / Apple / Microsoft aren't going to deploy millions of (expensive) extremely reliable overbuilt hosts to minimize the chance that one of their computers will crash at some point. And small fish aren't going to deploy these servers because it's cheaper to rent capacity from one of the bigger players.

[oddballstocks]

There's a second trend that I've noticed that I never appreciated.  Super Micro really benefitted from the inexpensive array of cheap compute notes theory of data centers.  This is what Google pioneered, a ton of cheap commodity machines you throw away as they die. But with virtualization we've moved to extremely reliable overbuilt hosts for VM's.

 

I highly doubt that. What's your source for this? Software eats the world. Eventually everything will run on commoditized hardware because at large scales it will always be cheaper to implement redundancy in software than in hardware. Google / Amazon / Apple / Microsoft aren't going to deploy millions of (expensive) extremely reliable overbuilt hosts to minimize the chance that one of their computers will crash at some point. And small fish aren't going to deploy these servers because it's cheaper to rent capacity from one of the bigger players.

 

Call any manufacturer and ask for a quote on a virtualization box. Plus hanging around the industry.

 

But just think this through. Virtualization sells threads/cores, ram and disk space.  It is more cost efficient to take a server from 10 cores to 20 cores and double the sticks of ram.  In a data center you pay for every amp of electricity you use. The marginal cost of more cpu cores and ram is very small compared to an entirely new machine.

 

A few things changed that made this shift possible.  Hyperconverged ethernet adapters. A host can have a 10/25/40Gbe ethernet adapter that's divided up into hundreds of small adapters for each host. Second is core density. In 2010 Xeon's had four or six cores.  You can buy a Xeon Platinum with 28 cores now, and in a dual NUMA machine that 56 cores or 112 threads for hosts.  Xeon's can support 1.5TB of ram, all in a single pizza box 1U.

 

A cloud provider then uses something like OpenStack and spins up hundreds of VM's across a small handful of machines. 

 

Effectively what happened is machines got quicker faster than applications could keep up.

 

In terms of Amazon/Azure being cheaper, that's completely false. It's 100% cheaper to buy and run your own servers all of the time.  I pay $500/mo for my half rack, the effective cost would be $20k/mo on AWS.  I have a friend who runs IT at a large company, they're moving to AWS.  He said "We know it's a lot more expensive, but it's easier than hiring, we can't hire good IT people. And the cost is opex vs capex."

 

I know another large company that's moving to the cloud, cost is irrelevant, it's because "IT is too slow, and we want to move quicker."  That's a theme.  My business partner has worked with a handful of Fortune 500 companies that he helped move to the cloud, the reason was the same.  Never cost, it's cheaper to buy and support your own, but it's easier to get around IT.  Execs love the idea of a recurring cost monthly vs a big budget spend one year, and then three years of nothing before IT's asking for an upgrade.

 

If you aren't convinced I'd say work out the math.  I have tossed around the idea of cloud hosting, the numbers are insanely lucrative.  The only way to do it is density, thread/core/disk.  Disk density is easy, you can buy a few Nimble's and plug everything into them. 

 

The way you thread this all together is with OpenStack and software defined networking.  You create pools of VM's that can migrate between two or three hosts.  This gives you the reliability.  The whole concept is built with automation in mind.  You can change routes, vlans, anything in the switch with a script.  These scripts can spin up and move VM's.  It's all automated and hands off.

 

There are some awesome YouTube videos out there from Facebook and AWS explaining how they build out data centers.  This is exactly it, extremely dense, and automated.  To get the density they're using quality enterprise gear, not cheap off the shelf stuff.  It's commodity in the sense they've moved from customized and expensive blades to 1U, but it isn't the off the shelf ATX motherboards that Google does that you're probably thinking of.

 

The lr;dr; of this is consider: 10 machines virtualized might move to a single hypervisor. The entire point of virtualization is less machines needed because VM's can share resources.  In the past what was 10 cheap servers are now on a single not as cheap dense server.  Look at some of the stuff where there are two or four nodes in a single server now.  It's all about density, not rooms of cheap single purpose pizza boxes.

 

[writser]

Thanks for the reply. So it is your take that SMCI motherboards are too unreliable to be used in such setups? That's what I am doubting and that narrative also doesn't seem to match with SMCI revenue over the past few years. But I could very well be mistaken.

[oddballstocks]

Thanks for the reply. So it is your take that SMCI motherboards are too unreliable to be used in such setups? That's what I am doubting and that narrative also doesn't seem to match with SMCI revenue over the past few years. But I could very well be mistaken.

 

There is one reason people go SMCI -> price. Tech is very much a "get what you pay for" world. Pay more, higher quality components. Higher quality could mean better capaciters, better resistors, better chips. Or more thought out design.

 

You can get 'nice' things at reasonable prices. Flash storage arrays etc. So an IT group will look and say "we can get all-flash from SMCI, or spinning disks from HPE for the same price.  Flash is better and we'll just suck up the lack of support and reliability on our own."  The psychology is the people ordering this stuff want the nicest they can get and budgets are squeezed.

 

There will always be a market for Kia cars, just like SMCI. A buyer of a Kia knows what they're getting, and I think the analogy holds for SMCI too.

 

[pcm983]

any thoughts now that we have gotten a bunch more rejections? surprised stock hasn't reacted more here.

 

https://www.computing.co.uk/ctg/news/3064829/no-evidence-of-chinese-state-attack-on-it-hardware-supply-chain-says-us-director-of-national-intelligence-dan-coats

 

supposedly earnings next week too - i have the stock trading at mid single digit p/e on ltm earnings.

 

also any thoughts on timing of accounting restatement?

 

 

[pcm983]

Apple CEO Tim Cook, in an interview with BuzzFeed News, went on the record for the first time to deny allegations that his company was the victim of a hardware-based attack carried out by the Chinese government. And, in an unprecedented move for the company, he called for a retraction of the story that made this claim.

 

https://www.buzzfeednews.com/article/johnpaczkowski/apple-tim-cook-bloomberg-retraction

[Foreign Tuffett]

any thoughts now that we have gotten a bunch more rejections? surprised stock hasn't reacted more here.

 

https://www.computing.co.uk/ctg/news/3064829/no-evidence-of-chinese-state-attack-on-it-hardware-supply-chain-says-us-director-of-national-intelligence-dan-coats

 

supposedly earnings next week too - i have the stock trading at mid single digit p/e on ltm earnings.

 

also any thoughts on timing of accounting restatement?

 

Thanks for posting today's news.

 

Insofar as the accounting restatement goes, the company has been consistently mum about when it might be completed. Obviously it's been a slow process.

[pcm983]

https://www.cnbc.com/2018/10/22/aws-ceo-jassy-follows-apple-calls-for-spy-chip-story-retraction.html

 

 

[writser]

I still think the whole 'spy chip' story is incredibly far-fetched:

 

- everybody is denying it and even calling for retraction. FBI, DHS, Amazon, Apple, etc.

- weeks have passed and there's still no evidence so far. The chip should have been found by now by random nerds on the internet. No concrete follow-ups from Bloomberg either.

- it would be an incredibly convoluted, expensive, unsure and risky way for the Chinese government to gain access to .... to what actually?

- I think it's actually a very stupid way to 'hack' because, once the secret has been spilled, it would immediately give away who is doing it and would be very easy to detect / circumvent.

 

It doesn't make sense on so many levels. I think it's way more likely the Bloomberg article is overblown / incorrect, even if that in itself is highly unlikely.

 

Yet the story is so powerful, has the perfect villain to scare US investors and has such a big impact if true that the market seems to assign way too much value to it. The only question is: what is the upside? I'm not sure how to value the company (which is why I only have a very small position and why I probably shouldn't own it in the first place). Book value doesn't seem to be the most useful approach but I also have a hard time predicting future earnings / cashflow. I'm basically in it for the spy chip drama, not for the 'hope they get-up-to-date-with-financials-and-have-good-results-in-2019' drama. Also, regarding upside: SMCI was already trading below $17 in May this year - before any of this happened .. And regardless of whether the spy chip exists or not, surely this story can't be good for business. So I don't mind selling opportunistically - I could be completely wrong about the spy chip as well. At what level I'm not quite sure yet.

 

After the storm has blown over Nate can buy my shares and make the easy money.

[Liberty]

Not to mention that there's been enough time for other journalists and security researchers to look for those chips and they would've found them by now. I saw somewhere (forget where..) that the WaPo and NYT both trying to corroborate the story but got nowhere. I also think that it would be a good way for a security consulting firm to make a name and get lots of PR if they came out with more details on the chip or confirmed it, yet I haven't seen anything yet. In fact, security experts interviewed by Bloomberg for background research on the story seem skeptical because lots of speculative things he said were claimed by the story as exactly what the supposed chip did.

[oddballstocks]

After the storm has blown over Nate can buy my shares and make the easy money.

 

Ha!!

 

The story is weird. It's very possible it's true. And I say this from what I'd seen 15 years ago when I worked at a startup that focused on security. We hired hackers, found exploits, were paid to break into networks, and then managed said networks. Some of the hardware devices back then were almost unbelievable.  So on that front I can see this.

 

But there are other threads to the story that don't make sense. Given SuperMicro's history, why go to all the lengths when the core boards are already vulnerable? I mean it's like a spy movie where there is some super secret plan to break into a building with ladders, ropes, secret gadgets when in the end the front door is wide open, not just unlocked, but wide open with no one home.

 

I know I've railed on the quality, but there is a place for that.  There is a huge market for low end machines by budget conscious companies.

 

I guess the question is what does the restatement bring, and will it drift cheaper?

[writser]

https://apple.slashdot.org/story/18/10/26/1719225/amazon-has-pulled-ads-from-bloomberg-over-controversial-big-hack-chinese-spy-story-apple-has-not-invited-outlets-reporters-to-a-product-event-next-week

 

Amazon pulled its fourth quarter advertisements on Bloomberg's website, a move some within the media giant think is retribution for its controversial story alleging that Chinese spies hacked into the online retailer's servers. According to a source in position to know, Amazon's digital media buyer, Initiative, informed Bloomberg's sales staff on October 16 that it would cancel its ad buys for the fourth quarter due to budget cuts. Internally, the source said, the staff received that decision, made only eight days after a previous communication with Initiative confirming that the ads would run, as a direct response to Amazon's displeasure over the October 4 story. (Amazon announced Thursday that its marketing expenses for Q3 2018 were 3.3 billion dollars, up more than 800 million dollars from the year before.) [...] According to multiple sources, Bloomberg was not invited to Apple's fall product event next week in Brooklyn.

 

Tech giants still angry over false accusations. Or: deep state cover-up continues?

[writser]

Supermicro® Announces First Quarter Fiscal 2019 Preliminary Financial Information and Decision to Restate Prior Period Financial Statements: link

 

The Company expects to report the following financial results for the quarter ended September 30, 2018:

 

* Net sales in a range of $952 million to $962 million compared to its previous guidance range of $810 million to $870 million

 

* GAAP and non-GAAP gross margin in the range of 13.2% to 13.4%

 

* GAAP fully diluted earnings per share in the range of $0.35 to $0.39; non-GAAP fully diluted earnings per share in the range of $0.66 to $0.70

 

* Cash flow from operations of $50 million and capital expenditures of $4 million

 

[..]

 

As of September 30, 2018, total cash, cash equivalents and short-term investments was $104.1 million and bank debt was $79.6 million.

 

 

Conference call transcript: link

 

Super Micro had a strong first quarter of revenue in net profit. As Charles mentioned, we estimate first quarter revenue within the range of $952 million to $962 million. It was approximately 40% higher year-over-year and above our guidance range of $810 million to $870 million. We grew revenue in all market verticals with key markets growing significantly year-over-year. Global 2000 grew approximately 130% year-over-year. Internet Data Center grew approximately 150%, while non-Internet Data Center grew approximately 95% year-over-year.

 

Accelerated computing was up 26% and Embedded grew approximately 30%.

 

On a year-over-year basis, the U.S. enjoyed the highest growth at nearly 45%, followed by EMEA that grew nearly 50% and Asia Pac that was up approximately 30%.

 

For the first quarter, we estimate cash generated from operations was $50 million. After deducting CapEx of $4 million, we estimate free cash flow of $46 million for the first quarter.

 

Market cap: ~600m.