Continue to avoid Super Micro Computer and Tesla
1) Shares of Super Micro Computer (SMCI) plummeted 33% on Friday after federal prosecutors indicted executives for smuggling AI servers to China.
In my August 29, 2024 e-mail, I shared a damning report on SMCI from short seller Hindenburg Research. In it, they exposed evidence of accounting manipulation, self-dealing, and sanctions evasion.
This is yet another example of why savvy investors, even if they never short a stock, should listen to short sellers. They're often the canaries in the coal mine, warning of impending blowups...
I've warned my readers multiple times about SMCI (archive here), most recently in my November 20, 2024 e-mail.
The stock had soared 31% in a single day after announcing it was hiring a new independent auditor after its previous one, Ernst & Young ("EY"), noisily resigned.
As I concluded:
... I think it's likely that the company has been committing accounting fraud, which EY discovered.
I think [its new auditor] will now find it and force SMCI to restate its financials... so to be on the safe side, continue to avoid the stock.
The stock is down around 30% since then. And it appears cheap, trading at only 9.1 times this year's consensus analysts' earnings estimates.
But in light of the degree of fraud at the company and the seriousness of the charges, I think there are more shoes to drop. So I would avoid this stock at all costs.
2) Speaking of stocks to avoid, let's take a look at Tesla (TSLA) – which is down 18% since I added it to my "Stinky Six" list on October 29...
There has been lots of recent news about the $1.4 trillion company and its CEO, Elon Musk, who's truly one of the world's most brilliant, fascinating, energetic, visionary, inspiring, yet infuriating people.
First, over the weekend, Musk announced plans to build a massive new chip factory in Texas to supply chips for Tesla vehicles and SpaceX satellites.
Also over the weekend, the Wall Street Journal reported on how Musk's decision to cut off Russians' access to Starlink has tilted the war in Ukraine's favor.
A jury also found Musk liable for some losses by Twitter investors after he had threatened to walk away from the social media platform acquisition.
Lastly, according to this WSJ article, Tesla's new semitrucks are amazing – the truckers who drove them in pilot tests loved the vehicle's features.
This is all very interesting news – but I would urge Tesla investors not to get distracted. As I've said many times before, one of the most important skills an investor must develop is the ability to filter out the noise and focus on what really matters...
And in this case, it's Musk's bold, pie-in-the-sky promises about the company's technology.
He says Tesla's Full Self-Driving ("FSD") system is now so advanced that the company's cars are capable of fully autonomous driving, with no need for a driver, safety driver, or even a steering wheel. If true, this would give Tesla's car sales a boost and allow it to launch a robotaxi service to compete with Alphabet (GOOGL) subsidiary Waymo.
Waymo is operating a fleet of approximately 3,000 autonomous vehicles in 10 U.S. cities and has significantly scaled its operations. It drives more than 4 million miles per week and provides more than 400,000 fully autonomous, electric-vehicle trips per week.
In contrast, Tesla's robotaxi service has been a total bust so far. Last July, Musk said Tesla would have "autonomous ride hailing in probably half the population of the U.S. by the end of the year."
Then in October, he proclaimed Tesla would have 500 robotaxis in Austin by the end of the year. In November, he revised the number down to about 60.
And now here we are in March, and the actual number of robotaxis without safety drivers is estimated to be no more than one or two dozen (Tesla won't reveal the exact number).
There's a simple reason for this failure: Tesla's system – both the hardware and software – isn't ready for prime time...
Musk keeps promising that the next upgrade of FSD software will be the solution, but I think the real problem is the hardware. As I wrote on January 12:
Recall that Musk has made a bold bet that Tesla can achieve full autonomy with cars that lack radar and lidar – that rely on vision (cameras) only.
Yes, Musk and his team have indeed achieved one engineering and technological miracle after another...
But I don't think a vision-only car will ever be able to achieve the level of safety that Alphabet subsidiary Waymo has reached with its cars, which are loaded with cameras, radar, and lidar. As such, Tesla will likely have to go back to the drawing board – delaying its robotaxi service by years.
Further evidence for this fatal flaw just emerged last week when the WSJ reported that federal safety regulators were looking into Tesla's ability to handle poor weather and roadway conditions.
[The National Highway Traffic Safety Administration ("NHTSA")] identified several crashes, including one fatal, where Full Self-Driving failed to alert drivers appropriately about reduced-visibility conditions, such as sun glare, fog or airborne dust. The probe originally began in 2024 to examine whether the system can appropriately respond in those scenarios.
As a result of this probe, Electrek's Fred Lambert thinks that Tesla is one step away from having to recall FSD entirely.
It's one thing for Musk to oversell the capabilities of FSD to investors. The worst that can happen to them is possibly losing some money.
But when he oversells it to Tesla owners and they come to rely on it, people can get injured and even die...
This WSJ YouTube video from last year highlights the consequences of Musk's recklessness, sharing evidence of more than 200 crashes due to Tesla's camera-based autopilot.
And in this alarming story in the Atlantic, Raffi Krikorian, who used to run the self-driving-car division at Uber Technologies (UBER), describes how Tesla's FSD nearly killed him and his two boys:
My memory is hazy, and some of it comes from one of my sons, who watched the whole thing unfold from the back seat. The car was making a turn. Something felt off – the steering wheel jerked one way, then the other, and the car decelerated in a way I didn't expect. I turned the wheel to take over. I don't know exactly what the system was doing, or why. I only know that somewhere in those seconds, we ended up colliding with a wall.
That said, it's important not to read too much into one story – I'm wary of the "tyranny of the anecdote." And my analyst, Kevin DeCamp, who's bullish on Tesla, regularly sends me videos of how well FSD handles difficult driving situations and avoids accidents.
But here's the problem for Tesla, which I think is likely to derail its robotaxi effort for many, many years: Human beings (including, importantly, politicians and regulators) aren't rational. They care less about statistics and more about stories – like Krikorian's.
Musk seems to think that FSD and/or robotaxis are safer than humans, therefore they should be rolled out as quickly as possible. And if there are a certain number of accidents, injuries, and deaths... well, as long as there are fewer than would have been the case with human drivers, then no problem – it's a net positive.
But that's not how the world works.
When the Federal Aviation Administration certifies a new aircraft – for example, as it's doing with my favorite speculative stock, Joby Aviation (JOBY) – the standard is most certainly not, "Is aircraft, per mile traveled, safer than a car?" The bar is orders of magnitude higher.
How much higher? According to this article from USAFacts:
From 2003 to 2023, there were a total of 675 serious injuries during domestic air travel, an average of 32 per year. Over 47 million people were hurt in passenger vehicles on US highways in the same span – approximately 2.2 million per year.
In other words, you're 68,750 times more likely to be injured in a car than on a plane.
As for deaths, an American's lifetime odds of dying in a car crash are about 1 in 95 – 115,789 times more likely than the 1 in 11 million odds of dying in a plane crash.
Do I think the bar for Waymo, Tesla, and others is 100,000 times safer than a human? Or 10,000 or 1,000 or even 100 times? No. But I do think 10 times is a reasonable expectation.
And that's exactly what Waymo is achieving. It has seen a 90% decline in serious injuries or worse across the four cities in which it's operating fully autonomous vehicles with no safety drivers, as this chart from Waymo's website shows:
This article in Human Progress shares that Waymo is indeed around 10.4 times safer than humans, according to the results of a liability claims analysis:
Swiss Re, one of the world's leading reinsurers, analyzed liability claims related to collisions from 25.3 million fully autonomous miles driven by Waymo. They found that the Waymo driver demonstrated better safety performance than human-driven vehicles, with an 88 percent reduction in property damage claims and a 92 percent reduction in bodily injury claims.
Meanwhile, Tesla's robotaxis are four times more likely to get in an accident than human drivers. That's according to data from the NHTSA from a small trial in Austin, Texas, as this Fortune article reports:
... Tesla is the only company to fully redact and hide details of all crashes from the public, thanks to a confidentiality provision under the NHTSA...
Still, the disclosures about the crashes underscore what Tesla has put forward for years regarding its autopilot program: humans are in fact safer. Actually, after this month's events, they are four times safer, according to Tesla's own metrics.
Combining these two stats, Waymos are roughly 40 times safer than Tesla robotaxis. No wonder Waymo releases all of its safety and accident data, while Tesla doesn't...
What are the investment implications? While Tesla's robotaxi crashes in Austin have mostly been minor or low speed, I believe it's only a matter of time before one of them kills someone. Then, the inevitable media scrutiny and public outcry will force Tesla to suspend its robotaxi program, just as Uber was forced to in 2018.
This could really impact the stock, especially given its nosebleed valuation: It's trading at 230 times trailing earnings and 185 times this year's estimates (which it will likely miss, as it has been doing for years).
Needless to say, Tesla remains firmly on my list of "Stinky Six" stocks to avoid.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.