Super Micro Computer’s Recent Struggles: What Investors Should Know (NASDAQ: SMCI) has made headlines as one of the biggest winners in the artificial intelligence (AI) sector. The company, known for producing essential servers and workstations for data centers, has experienced revenue growth in the triple digits recently. Consequently, its stock skyrocketed over 4,800% in five years leading up to February. This year alone, Supermicro’s stock spiked 188%, outpacing even Nvidia.

However, the company’s fortunes have dimmed in the latter half of the year. A wave of challenges, including a short-selling report alleging serious issues within the company, has caused stock prices to plummet. This week, Supermicro faced another setback as EY, formerly known as Ernst & Young, stepped down as its auditor due to concerns about the company’s internal financial controls. As a result, the stock tumbled 32% in just one trading session. How significant are these developments for Supermicro? Let’s explore.

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Key Issues Impacting Supermicro

First, let’s examine the troubling news that has surrounded Supermicro in recent weeks. Late in August, Hindenburg Research issued a short report claiming to have found “glaring accounting red flags” and other serious concerns. Supermicro responded firmly, stating that the report contained “false or inaccurate” statements.

It’s important to note that Hindenburg held a short position in Supermicro, meaning they were financially motivated to see the stock price decline, which raises questions about the credibility of their findings.

Further jitters arose when Supermicro postponed filing its 10-K annual report, raising alarm among investors about potential underlying problems. However, the company insisted it did not expect any significant adjustments to its earnings figures for the fourth quarter or the full year.

Adding to the turmoil, The Wall Street Journal reported that the Justice Department has opened an investigation into Supermicro. Both the U.S. attorney’s office and Supermicro declined to comment on this matter when contacted by the newspaper.

These issues have introduced a layer of uncertainty and have made Supermicro a cautious choice for investors. Despite the ongoing concerns, the stock’s valuation at around 15 times forward earnings estimates has attracted the interest of some aggressive investors willing to take risks.

Should You Consider Investing in Supermicro?

While EY’s resignation does not directly confirm the aforementioned complications, it does warrant caution for all investors. The auditor serves as an unbiased party and generally has insight into the company’s financial practices.

The decision by EY to resign suggests a lack of confidence in Supermicro’s management, a major concern for both auditors and investors alike. Investors must have trust in a company’s management, particularly in how they handle financial practices and strategic decisions.

In their resignation, EY highlighted: “We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management’s and the Audit Committee’s representations, and to be unwilling to be associated with the financial statements prepared by management.”

Warnings Raised Earlier This Year

Concerns from EY were first raised back in July, prompting Supermicro’s board to establish a special committee to look into the issues. This review is still ongoing.

In a filing with the Securities and Exchange Commission (SEC) addressing the resignation, Supermicro affirmed: “The Company has taken the concerns expressed by EY seriously and will carefully consider the findings of the Special Committee and any remedial or other actions recommended by the Special Committee following the conclusion of the Review.”

While it’s positive that Supermicro is addressing its concerns, the risks associated with the stock remain. It’s advisable to hold off on investing in Supermicro for now as the situation develops. Notably, this is not the first time Supermicro has dealt with accounting issues; in 2020, the SEC imposed a $17.5 million fine for “improper accounting.”

Does this put an end to Supermicro’s promising future? The company remains a leader in the AI server market, continues to experience strong demand, and could benefit from the emerging trend of data centers using direct liquid cooling (DLC) technology, which aligns with Supermicro’s expertise. Though Supermicro’s long-term potential may be intact, the current uncertainties make it difficult to draw definite conclusions. Therefore, it remains a company to watch, but from a distance until clearer indicators arise.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.