The AI Backdraft

Accounting Flames Threaten to Burn Down The AI Bubble

In Backdraft, Robert De Niro’s fire investigator chillingly explains that fire is not just a chemical reaction but a living, breathing entity: “It's a living thing. It breathes, it eats, and it hates. The only way to beat it is to think like it. To know that this flame will spread this way across the door and up across the ceiling, not because of the physics of flammable liquids, but because it wants to. Some guys on this job, the fire owns them, makes 'em fight it on it's level, but the only way to truly kill it is to love it a little.

This same approach applies to understanding financial statements and corporate accounting, where flames of fraud can smolder unseen before erupting into a full-blown disaster. Recent developments at Supermicro and AMD reveal a dangerous combination of smoke and fire, hinting that the AI chip market’s towering house of cards may soon come burning down.

Supermicro: History of Leaving Investors with 3 degree Burns

Supermicro’s history is a catalog of financial fires. In 2018, the SEC charged the company with “widespread accounting violations,” accusing it of channel stuffing, premature revenue recognition, and altering shipment terms to artificially inflate revenue. The allegations culminated in Supermicro being delisted from Nasdaq for failing to file financial reports for two consecutive years. Though it clawed its way back to compliance in 2020, these fires have left investors with 3 degree burns that have now led lawsuits against the company.

Today, those embers are flaring up again. In late October 2024, Supermicro’s auditor, Ernst & Young (EY), abruptly resigned, citing governance failures and an inability to rely on the company’s management. This sudden resignation sent a clear signal that the fire behind closed doors was no longer containable. Adding to the heat, Supermicro has failed to file its annual 10-K report back in June, an omission that leaves investors burned again to the company’s financial reality. Without the rigor of third-party audits, its unaudited 10-Q filings are the equivalent of smoke alarms blaring without firefighters in sight.

The numbers are no less incendiary. Supermicro last reported a staggering 373% increase in net income, climbing to $402 million despite no new product announcements or transformative market shifts. Simultaneously, its inventory numbers do not add up, accounts receivable burned to -$500 million, and free cash flow fell to -$525 million. Negative figures of this magnitude in key financial metrics are not just anomalies—they are arson-level warning signs. These distortions suggest Supermicro might be fanning the flames of its growth narrative with aggressive accounting practices.

Then there’s the matter of Ablecom, a supplier owned by the CEO’s brothers. Ablecom now accounts for 70% of Supermicro’s purchases, raising the risk of undisclosed related-party transactions and revenue manipulation. A $162.1 million surge in orders to Ablecom intensifies these concerns, highlighting how concentrated supplier relationships can mask deeper vulnerabilities. With Ablecom as the sole supplier of chassis—a critical server component—any disruption in their operations could ignite a financial inferno, paralyzing Supermicro’s production and potentially incinerating its revenue streams.

To read the last 10Q where all this data was pulled from, click HERE

AMD: The Fire Spreads

As Supermicro struggles to contain its fires, the fire has now reached AMD, one of its primary suppliers and a cornerstone of the AI chip market. On November 18, 2024, AMD’s Chief Accounting Officer resigned (effective immediately), a move eerily timed with EY’s departure from Supermicro. When the same auditor that flagged governance failures at Super Micro also oversees AMD financials, as they get ready for their 10k filing next month.