Super Micro Computer and Lumen Technologies have significantly benefited from the rise in interest in artificial intelligence over the past year. The surge in enthusiasm for AI has driven the market to unprecedented heights, and companies linked to the future of artificial intelligence have experienced substantial gains, anticipating increased demand for their offerings in this burgeoning market.
However, as stock valuations have climbed, short sellers have begun targeting companies they believe may not fulfill the high expectations. Super Micro Computer, a computer server and cloud provider, and Lumen Technologies, a telecommunications company, have both attracted the attention of short sellers. Wall Street analysts have offered differing recommendations, suggesting investors sell one stock and hold the other.
Lumen Technologies, which operates one of the largest interconnected fiber-optic cable networks, has seen its stock rise approximately 250% this year. This increase is largely due to the view that Lumen’s fiber-optic infrastructure will be vital for connecting the data centers needed for AI applications. In August, the company reported $5 billion in new business attributed to AI demand. Nevertheless, short sellers, including Kerrisdale Capital, have raised doubts about the company’s valuation and its true ability to capitalize on the AI boom. Kerrisdale’s report contends that the hype around Lumen is premature and characterizes the new business as a bid to address declining revenues and liquidity issues. The report also points out that potential future sales exclude leading tech firms in the AI space and are instead focused on older businesses still exploring AI.
Wall Street analysts seem to align with Kerrisdale’s perspective. According to TipRanks, none of the eight analysts recommend buying Lumen’s stock, with five advising to hold and three advocating to sell. The average price target of $4.09 suggests a 38% downside from the current price. High debt of around $20 billion adds to the challenges Lumen faces, despite ongoing turnaround efforts. Questions about the company’s involvement in AI prompt caution among investors until more sales evidence emerges.
Super Micro Computer, a maker of computer servers and storage solutions, holds the distinction of being the most shorted stock in the S&P 500 as of October 21, with over 21% of its outstanding shares sold short. The company has garnered considerable interest due to its potential role as infrastructure for AI and machine learning data storage, leading to a 68% increase in its stock this year. In August, Hindenburg Research published a short report alleging accounting misconduct, recalling a 2018 Securities and Exchange Commission charge against Super Micro Computer for improper revenue recognition and understated expenses. The report further claims that senior employees involved in the earlier scandal have been rehired.
Amid these accusations, Wall Street analysts have mixed views: three suggest buying the stock, ten recommend holding, and one advises selling, with an average price target of $64, implying a 34% upside. Super Micro Computer delayed its latest annual report filing, but CEO Charles Liang stated in a filing that no significant financial changes are expected and mentioned the formation of a committee to review internal controls. Liang has promised to address the short report allegations in due course.
Investors may find such cases challenging due to the difficulty of accessing and evaluating pertinent information. While Super Micro Computer possesses potential, the advice is to avoid taking substantial positions until more clarity is provided, especially considering past regulatory issues.
