Super Micro Computer’s Turbulent Journey: A Cautionary Tale for Investors
Headwinds and Hurdles: Unpacking Supermicro’s Sharp Stock Decline
Super Micro Computer (NASDAQ: SMCI), often referred to as Supermicro, attracted significant attention as one of the most sought-after AI stocks. Previously, its shares soared to a peak of $118.81 on March 13, marking an impressive 5,080% increase over four years.
At that time, Supermicro was riding a wave of optimism. Its revenue surged by 46% in 2022, followed by a 37% rise in 2023, with analysts predicting a striking 110% growth in 2024. This remarkable expansion was fueled by a sharp increase in sales of dedicated AI servers.
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However, the situation has changed dramatically, and Supermicro’s stock is currently priced at about $23. This valuation appears inviting with a forward earnings ratio of 7 times and less than 1 time based on projected sales for next year. Nevertheless, understanding the reasons behind this drastic decline is essential before viewing it as a potential turnaround opportunity.
What Led to Supermicro’s 80% Stock Plunge?
Supermicro faced significant challenges when it was delisted from Nasdaq in 2018 due to an investigation by the Securities and Exchange Commission (SEC) regarding “improperly and prematurely” booked revenue. The company was only relisted in 2020 after settling with the SEC.
Many believed Supermicro had put these issues behind it. However, this August, short-seller Hindenburg Research published a report alleging that the company had again inflated its revenue through partial orders. While management disputed these claims, they subsequently postponed their annual 10-K filing for fiscal 2024, stating the need for more time to evaluate their “internal controls over financial reporting.” By the end of October, their auditor, Ernst & Young, resigned, indicating they were “unwilling to be associated” with the company’s financial statements.
If Supermicro fails to submit its 10-K by November 16, it risks being delisted again, which could trigger early repayment of its $1.725 billion convertible notes due in March 2029. This situation would create immediate financial strain, as bondholders could demand repayment if the stock is delisted.
As of the end of September, Supermicro had $2.1 billion in cash and equivalents. However, an immediate repayment would deplete these resources, hindering the company’s ability to acquire more high-end GPUs for their AI servers.
To mitigate this potential crisis, its key supplier, Nvidia (NASDAQ: NVDA), is reportedly redirecting some GPU orders from Supermicro to its rivals. Customers may also turn to other major server manufacturers like Dell (NYSE: DELL) and Hewlett Packard Enterprise (NYSE: HPE) to avoid the fallout from Supermicro’s precarious situation.
Furthermore, reports indicate that the Department of Justice has initiated a new investigation into Supermicro, adding regulatory pressures that complicate the company’s efforts to swiftly address its accounting issues and stability concerns.
Supermicro: An Investment Gamble Until Key Issues Are Resolved
Without an audited 10-K filing, the reliability of Supermicro’s past financial reports remains uncertain. Ernst & Young’s withdrawal from the auditing engagement raises significant concerns; as one of the largest accounting firms, its departure signals deeper troubles. Other major firms are unlikely to step in quickly to take on the auditing responsibilities.
A potential delisting may lead to a sell-off among investors, negatively impacting liquidity if the stock moves to over-the-counter markets. This shift could further complicate Supermicro’s ability to manage its debt, acquire new GPUs, retain customers, and compete effectively.
Without resolving these critical issues, it is prudent to approach analysts’ optimistic forecasts for the company with caution. It is important to refrain from viewing the stock as a bargain until more transparency emerges regarding the implications of its current challenges.
Though Supermicro may appear to be an undervalued, high-growth prospect, it remains at risk of further declines unless several conditions are met: securing a new auditor, filing the 10-K on time, maintaining Nasdaq listing status, and addressing Justice Department concerns. Until these criteria are fulfilled, investing in Super Micro Computer is not advisable.
Is Investing $1,000 in Super Micro Computer Warranted Right Now?
Before considering an investment in Super Micro Computer, keep in mind:
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Leo Sun 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 the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
