Super Micro Computer Stocks Surge but Concerns Amid Delisting Loom

Super Micro Computer stock (NASDAQ: SMCI) saw a significant increase of about 15% during Thursday’s trading session and boasts a remarkable rise of nearly 66% over the past week. These gains are largely attributed to the company successfully delaying its potential delisting from the Nasdaq exchange following setbacks in filing its financial reports. On Monday, Super Micro announced the appointment of BDO as its new public auditor, succeeding Ernst & Young, which resigned in October due to concerns about the company’s financial statements. With this new auditor in place, Super Micro plans to file its delayed 10-K report for the fiscal year ending in June, along with its latest quarterly filing for September. However, no specific timeline for these filings has been shared. The company has also submitted a compliance plan to Nasdaq. Despite the recent rally, SMCI stock still lags over 70% from its all-time highs earlier this year, although it trades at a reasonable multiple of about 10x consensus FY’25 earnings. Is now the right time to invest in SMCI? The answer may be more complicated than it seems. For those following big tech, you may also be interested in What’s Happening With Google Stock.

In the past three years, SMCI stock has consistently outperformed the broader market. The stock returned 39% in 2021, jumped 87% in 2022, and soared 246% in 2023. Conversely, the Trefis High Quality (HQ) Portfolio, which comprises 30 stocks, has experienced less volatility while outperforming the S&P 500 each year during this time. The HQ Portfolio presents a less tumultuous investment narrative, providing better returns with reduced risk compared to the benchmark index. So what is the current outlook for SMCI stock?

Super Micro Computer has emerged as a significant player in the growing generative AI sector, with soaring demand for its server systems. Revenues more than doubled in FY’24, and estimates suggest an additional increase of 80% for the current fiscal year. Although the server market is becoming increasingly commoditized, Super Micro has leveraged its reputation for customizable and energy-efficient products, distinguishing itself from its competitors. Its longstanding partnership with AI chip leader Nvidia might provide a further competitive advantage, as Nvidia’s recent chips and products integrate more smoothly with Super Micro’s servers than those of rival companies. During its latest quarterly earnings call, Nvidia recognized key partners, including Super Micro, further affirming the strength of their collaboration despite ongoing governance issues at Super Micro. Such partnerships may bolster investor confidence in the company’s ongoing operations.

Despite this momentum, investing in SMCI carries risks. While the company has managed to defer its delisting, serious concerns remain about its accounting practices. The promising growth in AI and strong demand for Super Micro’s offerings don’t outweigh the significant corporate governance challenges and ambiguities surrounding financial reporting. In August, Hindenburg Research flagged multiple issues with the company’s accounting, while The Wall Street Journal reported that the U.S. Justice Department may be investigating Super Micro, although this inquiry was reportedly in its early stages.

Hiring a new auditor is a step toward progress, yet investors should question why a major auditing firm like Ernst & Young opted to distance itself from the company’s financials. The company’s history of delayed reporting alongside raised concerns from various sources creates an environment of mistrust. While the current valuation may seem attractive, lingering issues with internal controls and accounting practices could threaten the firm’s long-term sustainability and its ability to deliver value to shareholders. The uncertainty around whether the new auditor will endorse the company’s accounts is also worrisome. If there are financial inaccuracies, shareholders could be basing their investments on unreliable data. Given these potential pitfalls, a prudent approach may be to exercise caution with SMCI stock. For those with a more conservative investment style, you may want to consider if you should Buy, Sell Or Hold CSCO Stock?

[1] Returns as of 11/22/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates

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