It is difficult for accounting rules to keep up with the pace of technological change, which is one reason why technology companies' profits can sometimes diverge significantly from cash flow. This can leave companies looking either extremely overvalued or undervalued relative to those profits.
Super Micro Computer (US:SMCI) designs, manufactures and distributes servers. It buys all the parts for a server, including semiconductors, racks and networking cables, and puts them all together. It will then ship the servers to customers. It has been one of the big early beneficiaries of artificial intelligence (AI) as clients scramble to get their hands on more computing power. In the year to June, revenue more than doubled to $14.9bn (£11.3bn), and in the past two years, its share price has risen over 600 per cent.
However, at the end of August, activist short-seller Hindenburg Research published a report, accusing Super Micro of “accounting red flags”, which it said was based on interviews with former members of the company's sales team. The allegations included 'channel stuffing' with partial shipments: a practice whereby sales people send a partial shipment of servers to a customer but then recognise the full order as revenue.