When We Cannot Know: Considering the Suspenseful Case of Super Micro
Today we will look back and look forward. We'll recall a dark tale of a notorious mining company – no longer among the corporate living – and we'll compare and contrast what happened back then with what is happening and might happen at server vendor Super Micro. Fortunately, the differences far outweigh the similarities, but there are some analogies that are worth exploring.
Let us begin.
In the 1990s — remember them? — a Canadian mining company called Bre-X had more than its allotted 15 minutes of fame. The company became a business-world cause célèbre, and then the center of an enormous business scandal.
Before its implosion, Bre-X comprised a group of related Canadian companies. At the eye of the storm was Bre-X Minerals Ltd., a subsidiary of Calgary, Alberta-based Bre-X, which indicated that it was poised to capitalize on an immense gold deposit near Busang, on the island of Borneo, Indonesia. Consequently, Bre-X’s share price skyrocketed in anticipation of the huge windfall. Formerly a penny stock, Bre-X saw its stock price reached a split-adjusted peak of C$286.50 on the Toronto Stock Exchange in May of 1996. At the pinnacle of its market heights, the company owned a market capitalization of more than C$6 billion.
For shareholders, it was like a dream come true. The dream, however, soon turned into a nightmare. In 1997, gold samples taken from the mine were found to be fraudulent — not pure gold but doctored, intentionally salted with gold dust. Bre-X Minerals collapsed in the aftermath. The final act, which was more like an epilogue, featured an explosion of lawsuits, with armies of lawyers marching into the spotlight from stage right and stage left.
The Wikipedia entry on Bre-X provides some additional context:
Bre-X's gold resource at Busang was a massive fraud. Encouraging gold values were intersected in many drill-holes and the project received a positive technical assessment by Kilborn. Crushed core samples that had been subjected to mineralogical examination by Bre-X's consultants turned out to have been falsified by salting with gold. In fact in an old report, found in Bre-X files, a mineralogist had reported that some gold particles in Busang samples had the darker yellow skin compared to the interior and some had delicate morphologies composed of electrum. The yellow rims result from selective leaching of silver from the surface of gold particle during river transport or during supergene (in-situ) processes. Electrum is inconsistent with an alluvial origin. The mineralogy gave no indication that it was alluvial gold and was consistent with the assumed origin of the samples. None of the mineralogists who studied the gold grains gave any indication that the gold was not consistent with a hard rock origin. The salting of crushed core samples with gold constitutes the most elaborate fraud in the history of mining. In 1997, Bre-X collapsed and its shares became worthless in one of the biggest stock scandals in Canadian history, and the biggest mining scandal of all time.
Scandal and Death
I remember it well. Fortunately, I was not a shareholder in the company, but I was following the saga while working at Cisco Systems in San Jose, California. During lunches, I’d talk with some colleagues about the Bre-X affair. We found it fascinating that the pending results of the tests on the gold samples would render one of two verdicts: either the company would be one of the richest gold miners in history or it would be an unprecedented fraud, a bust of epic proportions.
Before a metallurgical verdict was rendered, each of us had an opinion on how the matter would be resolved. A few of my colleagues had even invested small amounts of money on the hopeful premise that Bre-X had discovered a massive motherlode of gold. I was less sanguine. I had no interest in investing in what was effectively a coin toss: heads you win a vast windfall, tails you lose everything, or at least everything you ventured to risk on the shares.
Allow me here to interject, in a textbook instance of radical understatement, that Bre-X was an exceptional case. Rarely do you find the fate of company so starkly framed in such a binary circumstance, a high-contrast drama where the screen will go all black or all white; or, to use the color scheme of the stock market, all green or all red. It’s no wonder that the saga of Bre-X not only dominated, for a brief period, the world’s business news, but was parsed and studied comprehensively in business schools for years afterward.
As you might expect in a tale as dissolute as the Bre-X debacle, the riches-to-rags narrative featured a cast of disreputable, flamboyant, and raffish characters. One of the principals, Michael de Guzman, Bre-X Minerals’ chief geologist, appeared to have died — just as the plot was reaching its climax — in what we can justifiably call mysterious circumstances. Debate endures as to whether he committed suicide by jumping to his death from a helicopter, whether he was murdered by parties unknown, or whether he died at all. A body was undoubtedly found, as was a suicide letter, but importunate questions remain as to whether the body and the suicide note were de Guzman’s. Some say de Guzman fled to the Cayman Islands. Perhaps we’ll never know how or whether he died.
Allow us now to pivot, as the cool kids in the corporate world like to say.
Let me be clear at the outset: I’m not about to compare what’s happening now with Super Micro to what transpired in the Bre-X scandal. Super Micro is a longstanding company with real-world products, a large installed base of satisfied customers, and an undeniable record of revenue growth and profitability. Bre-X arguably possessed none of those attributes, from its inception to its gory demise.
Super Micro is Not Bre-X
So, no, Super Micro is not Bre-X, not in the slightest. Nonetheless, as reported by Barron’s, Super Micro’s stock was the most volatile of S&P 500 companies in 2024. Something approximating normality, denoted by incremental moves up or down from day to day, has characterized Super Micro’s trading range so far this year, but this is only January 3. There’s not much form in the 2025 book, folks, and there’s plenty of time for the situation to improve or to get worse in the next 362 days.
My point in referencing Bre-X in juxtaposition to Super Micro is that, whenever acquisitive people and massive amounts of money are involved, situations can get weird. The market is certainly no refuge from mania, as history reaching back centuries will attest. The unwary are always at risk of being fleeced. You know the one about a fool and his money, don’t you?
As for Super Micro, its volatility is at least partly attributable to the fervid expectations that surround all things AI. Super Micro provides servers that are deployed in AI datacenters, and its business has benefited from the AI boom. The question is, how much has Super Micro benefited? You might think answering that question is simply a matter of consulting the company’s financial results. Unfortunately, Super Micro’s financial results are being vigorously questioned, as this excerpt from the Barron’s article explains:
Super Micro has had a difficult six months. Short seller Hindenburg Research published a report criticizing the artificial intelligence server maker’s accounting practices; a Wall Street Journal report that the Department of Justice is probing the company; and its auditor Ernst & Young resigned saying it didn’t want to be associated with Super Micro’s financial statement. The server maker has said an independent committee found no evidence of fraud or misconduct, and appointed BDO its new auditor.
Nevertheless, Super Micro lost its title as the market’s AI darling. The stock plummeted to $18 in November, only months after hitting a record high of $119 in March. Shares have recovered partly since then and ended 2024 up about 7%, trailing the Nasdaq Composite which rose 29%.
The market still has some concerns and the stock is unlikely to reach new highs until Super Micro’s management provides further details around its financials. It got an extended deadline from Nasdaq to file its delayed annual and quarterly reports by Feb. 25 which may shed light on some of the question marks. The company has also said it would appoint a new CFO.
Two Sides of a Chasm
No, Super Micro is not Bre-X, not even close, but the preceding paragraphs from Barron’s are studded with enough red flags to conjure a National Day Parade in Beijing. Allegations about the company’s accounting practices? Check. A Wall Street Journal report suggesting that the U.S. DoJ is investigating the company? Check. The company’s auditor disavows any connection with the company’s financial statement? Check. Amid all the murk and mystery, the company’s reporting of its latest annual and quarterly financial results was significantly postponed? Check.
There’s a possibility, of course, that Super Micro will belatedly produce financial results that allay investors’ fears and return the company to the good graces of the market. There’s also a possibility that the situation could get worse before it has any prospect of getting better. From our current vantage point, we simply cannot know. As an investor or prospective investor in Super Micro, you might believe in the company or you might not; you might doubt the company, or you might not. On either side of the chasm, there’s no solid ground.
It’s a fascinating set of circumstances surrounding Super Micro, though not as binary, definitive, or extreme as the fatal test of putative gold samples that brought down Bre-X. Still, just as with Bre-X, we will see trades on both sides of Super Micro divide before February 25. Nobody making those trades – presuming insiders abide by the ethical conventions and the law – will actually know what will be revealed on February 25. They are, all of them, effectively gambling on the outcome.
As for me? Well, as I did during the dramatic Bre-X denouement, I’ll watch with avid disinterest from the sidelines. It could go one way or the other, and some people might have a lot of money riding on the outcome. I am content to watch the roll of the dice rather than to sidle up to the table and participate in the action.