Super Micro Computer (NASDAQ: SMCI) presents an exciting investment option, being both a fast-growing company and undervalued. But recent issues in accounting have raised questions about its potential. In this article, we’ll examine whether Supermicro can resolve its current challenges and create significant value for shareholders.
Super Micro Computer: Can It Overcome Recent Accounting Hurdles?
Facing Serious Challenges
Supermicro’s troubles began on August 7, when the short-seller group Hindenburg Research published a critical report. This report accused the company of manipulating its accounting, engaging in self-dealing, and evading sanctions linked to the Russian invasion of Ukraine. Following this, Supermicro delayed its annual report, putting its listing on the Nasdaq Stock Market at risk.
The situation deteriorated further when Ernst & Young, the company’s auditor at the time, resigned on October 30. They cited ongoing disagreements with management and an unwillingness to be associated with Supermicro’s financial practices. Consequently, Supermicro’s stock plummeted, falling 76% from its all-time high of $119 reached in March. Nevertheless, the company appears poised to tackle some of these issues.
On November 19, Supermicro announced that it had appointed a new auditor, BDO, aimed at helping the company file its annual report and restore compliance with Nasdaq to avoid delisting.
While uncertainty lingers since the Nasdaq must still approve this compliance plan, a successful outcome could enhance the company’s valuation significantly. A delisting would hinder liquidity and deter mainstream asset managers, who typically shy away from stocks on less-regulated over-the-counter exchanges.
Strong Business Fundamentals Amid Challenges
Resolving Supermicro’s accounting issues will enable the market to focus on its strong business fundamentals. Recent management updates revealed preliminary financial data for its fiscal first quarter.
Expected net sales are between $5.9 billion and $6 billion. Although this is lower than the previous guidance of $6 billion to $7 billion, it still signifies a remarkable 180% increase in year-over-year sales. Moreover, Supermicro has catalysts for continued growth.
As a server manufacturer, the company plays a vital role in converting artificial intelligence (AI) graphics processing units (GPUs) made by firms like Nvidia and Advanced Micro Devices into ready-to-use computer servers.
This specialization positions Supermicro to benefit from high-demand products created by its partners, such as the upcoming Nvidia Blackwell AI chips expected to launch in 2025. These chips promise significant performance upgrades compared to earlier versions, making them essential for companies striving to stay competitive. Likewise, AMD is set to release its own AI chip, the Instinct MI325X, which aims to compete with Nvidia’s offering.
Image source: Getty Images.
Valuation Looks Attractive, But Proceed Cautiously
Currently trading at a forward price-to-earnings (P/E) ratio of just 6.3, Supermicro’s stock appears remarkably undervalued relative to its impressive growth rate. Although investors should treat the unaudited first-quarter figures cautiously, they suggest that the company has the potential to generate substantial returns once accounting uncertainties are resolved.
However, Supermicro’s fundamental operations may not be insulated from potential fallout. The ongoing legal and regulatory issues could lead suppliers and customers to redirect their orders to avoid any disruptions. Therefore, careful evaluation of the risks and benefits is crucial before investing in the stock.
Is Now the Right Time to Invest in Super Micro Computer?
Before considering an investment in Super Micro Computer, it’s essential to weigh the following:
The Motley Fool Stock Advisor analyst team has recently highlighted what they believe are the 10 best stocks for investors to consider, and Super Micro Computer does not appear on that list. The selected stocks have the potential to deliver significant returns in the near future.
For example, if you had invested $1,000 in Nvidia when it was added to this list on April 15, 2005, that investment would have grown to $869,885!*
Stock Advisor provides a straightforward guide for investors aiming for success, featuring portfolio-building strategies, regular updates from analysts, and two new stock recommendations every month. The Stock Advisor service has achieved more than quadrupled the returns of the S&P 500 since 2002.*
See the 10 stocks »
*Stock Advisor returns as of November 18, 2024
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and 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.
