Super Micro Computer’s Volatile Week Signals Mixed Investment Outlook
Super Micro Computer (NASDAQ: SMCI) Stock experienced significant fluctuation last week, surging in after-hours trading on Tuesday following the company’s filing of delayed annual and quarterly reports with the Securities and Exchange Commission (SEC). Nonetheless, it relinquished a substantial portion of those gains in Wednesday’s session, ultimately declining further through the end of the week. As of now, the Stock has climbed nearly 65% year to date but remains down more than 40% over the last year.
With the tech company alleviating uncertainties regarding its financial standing, investors are left to ponder: is it time to dive back into the Stock?
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Accounting Concerns Arise
Supermicro entered 2024 as one of the market’s most sought-after stocks, largely due to its role in the artificial intelligence (AI) infrastructure expansion. Designing and assembling servers and rack solutions, the company was an early adopter of direct liquid cooling (DLC) in its offerings. It holds a position as one of Nvidia‘s largest clients, functioning mainly as a reseller of Nvidia’s graphics processing units (GPUs) placed into its data center servers.
As a systems integrator, Supermicro faces lower gross margins. The stock’s momentum faltered in August when its fiscal Q4 results revealed margin pressures. The gross margin dropped to 11.3% from 17% the previous year as the company reduced prices to secure new design wins. (Note that Supermicro’s fiscal year concludes in June.)
This downward trend continued when Hindenburg Research published a short report alleging accounting manipulation and improper dealings with related parties.
The situation worsened on announcement day for its delayed 10-K annual report, as Supermicro cited a need to evaluate its internal control design and effectiveness. Previously, in 2020, the SEC penalized Supermicro following revelations that its former CFO had prematurely recognized revenue and understated expenses over three years.
The Stock continued to falter after The Wall Street Journal reported a Department of Justice investigation into the company concerning potential accounting infractions. It wasn’t until last month that Supermicro confirmed it was subject to subpoenas from both the Justice Department and the SEC.
A brief rally occurred after Supermicro announced orders for over 100,000 GPUs featuring DLC technology for major data centers. However, shares fell after auditor EY resigned, citing its “unwillingness to be associated with the financial statements prepared by management.” EY voiced deep concerns about Supermicro’s governance, transparency, and internal controls.
The troubles impacted the company’s business, prompting it to revise its fiscal first-quarter revenue guidance to $5.9 billion to $6 billion from a previous $6 billion to $7 billion projection. The actual Q1 revenue later fell short of analysts’ consensus at $5.6 billion to $5.7 billion, missing expectations of $5.95 billion as per Bloomberg data. The gross margin also remained underwhelming, projected between 11.8% and 11.9%.
The company ultimately filed its reports, revealing these key figures:
| Metric | Fiscal 2025 Q1 | Fiscal 2025 Q2 |
|---|---|---|
| Revenue | $5.94 billion | $5.68 billion |
| Revenue growth | 180% | 55% |
| Gross margin | 13.1% | 11.8% |
Data source: Super Micro Computer.
Despite facing challenges, the Stock began to rebound after the hiring of accounting firm BDO as its new auditor, alongside a commitment to meet filing deadlines and avoid Nasdaq delisting.
Following the February 25 filing, the company declared its compliance with Nasdaq listing standards, indicating closure on the matter. Management clarified that there would be no restatements to previously filed financial statements.
Image source: Getty Images.
Is Now the Right Time to Buy the Stock?
While Supermicro successfully filed its report and averted delisting, BDO’s issuance of an “adverse opinion” regarding its internal financial reporting controls suggests the company has ineffective systems. This raises the likelihood of undetected misstatements.
Research has shown that firms issuing adverse opinions tend to see their auditing firms changed and often suffer losses. Therefore, BDO’s actions, along with EY’s resignation, were significant decisions. Nevertheless, the completion of SEC filings does not imply the investigations from both the Justice Department and SEC have concluded, nor is it clear if they continue.
Although Supermicro adjusted its revenue guidance downward for the current fiscal year, it still aspires to achieve a revenue target of $40 billion for fiscal 2026, a significant increase from the $23.5 billion to $25 billion forecast for fiscal 2025. This growth potential and the Stock’s appealing valuation (12.5 times forward P/E based on fiscal 2026 estimates) could entice investors.
However, investing in Supermicro ultimately relates closely to developments in AI infrastructure. Therefore, those looking for exposure to that trend might consider various alternatives that do not involve a low-margin systems integrator with a troubled accounting history.
Should You Invest $1,000 in Super Micro Computer Now?
Before committing to Stock in Super Micro Computer, keep the following in mind:
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For instance, Nvidia’s inclusion on this list on April 15, 2005 means a $1,000 investment then would be worth $765,576 now.
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Geoffrey Seiler 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.
