Super Micro Computer Faces Challenges While Nvidia Looks to Protect Itself
Super Micro Computer (NASDAQ: SMCI) and Nvidia (NASDAQ: NVDA) have both prospered during the current artificial intelligence (AI) surge. Nvidia produces graphics processing units (GPUs) and other related products and services. Meanwhile, Super Micro Computer, commonly referred to as Supermicro, integrates Nvidia’s GPUs along with those from other manufacturers into its data center server systems. This partnership has contributed to impressive triple-digit sales growth in recent quarters, bolstered by strong market demand, indicating a positive outlook ahead.
Recently, however, Supermicro has encountered significant hurdles. An August short-selling report raised serious allegations against the company, leading to the postponement of its 10-K annual report. Shortly thereafter, The Wall Street Journal reported that the Justice Department had initiated an investigation into Supermicro. The situation worsened when Ernst & Young, Supermicro’s auditor, resigned due to concerns about the company’s financial reporting practices.
Investors may naturally be concerned about how these developments could affect Nvidia, given their business ties. However, there is a possibility that a recent initiative by Nvidia may insulate it from Supermicro’s complications.
Image source: Getty Images.
Understanding Supermicro’s Current Troubles
To fully grasp the gravity of Supermicro’s situation, it’s important to delve into the details. The issues began with a report from Hindenburg Research in late August, alleging significant accounting problems within the company. Supermicro labeled these claims as “false or inaccurate.”
The company also postponed filing its 10-K annual report but assured stakeholders that it anticipated no significant changes to fourth-quarter or annual earnings. Nonetheless, Supermicro now faces potential delisting after receiving a non-compliance letter from Nasdaq due to the delay, and it must file its 10-K or submit a compliance plan soon.
Furthermore, Supermicro has chosen not to comment on the Justice Department’s investigation reported by The Wall Street Journal.
Adding to the uncertainty, Ernst & Young resigned as Supermicro’s auditor. The firm stated it could no longer trust the representations made by Supermicro’s management and Audit Committee and would not associate with the company’s financial statements. Since the initial report, Supermicro’s stock has plummeted by 52%.
Nvidia’s Connection to Supermicro
Now, it’s essential to explore how Nvidia fits into this picture. Supermicro’s 2023 annual report notes that large equipment orders may require increased working capital, potentially leading to higher borrowings under its credit facilities. Recent earnings reports indicate a continued demand for Supermicro’s rack-scale solutions that utilize Nvidia’s GPUs.
Given Supermicro’s current challenges, there is a risk that the company may struggle to secure additional financing to fulfill orders, which could, in turn, affect Nvidia’s revenues, at least in the short term. This situation is particularly relevant as Nvidia gears up to introduce its new Blackwell architecture platform, which is in high demand.
Nvidia’s Strategy in Response
Should investors be worried about Nvidia in light of these developments? Fortunately, Nvidia seems to be taking proactive measures to mitigate potential supply chain disruptions and sales impacts. Reports indicate that Nvidia plans to shift its Supermicro orders to alternative vendors, as stated in an article by DigiTimes Asia.
This strategic shift should help minimize potential sales disruptions and maintain a smooth supply chain, although Nvidia may still experience some short-term effects. Supermicro is a major equipment manufacturer, and with demand for the Blackwell architecture exceeding supply, every contribution to delivering that product remains crucial.
Despite the risks, taking a long-term perspective suggests a hopeful outlook for Nvidia. If the reports are accurate, Nvidia is navigating this situation effectively, and any short-lived effects on revenue or delayed order deliveries should remain manageable.
Ultimately, short-term challenges are unlikely to alter Nvidia’s strong long-term trajectory. The demand for Nvidia’s products and services remains robust, as the company collaborates with various partners—from equipment manufacturers to cloud service providers. Therefore, if Nvidia’s stock faces downward pressure due to Supermicro’s troubles, this could represent an excellent buying opportunity.
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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 those of the author and do not necessarily reflect those of Nasdaq, Inc.
