Super Micro Computer Faces Turbulent Times Amid Scandal

What’s behind the downfall of Super Micro Computer(NASDAQ: SMCI)? The company’s stock has plummeted amid a serious controversy affecting its business operations.

This timeline illustrates the recent events:

• Aug. 27: Hindenburg Research releases a report accusing Supermicro of accounting fraud, self-dealing, sanctions evasion, and channel stuffing, leading to a sharp decline in shares.
• Aug. 28: The company announces that it cannot file its 10-K on time, needing more time to assess its internal controls over financial reporting. They claim there will be no changes to the fiscal 2024 results posted on Aug. 6.
• Sept. 3: Supermicro reassures customers and partners that it doesn’t foresee significant changes to fiscal 2024 results, labeling the short-seller report as false.
• Sept. 20: Nasdaq communicates to Supermicro that it is out of compliance due to the late 10-K filing, giving the company 60 days to resolve the issue.
• Sept. 26: Reports surface that the Justice Department is investigating Super Micro Computer following allegations from a former employee about accounting violations.
• Oct. 30: Supermicro discloses that its auditing firm, Ernst & Young (EY), has resigned after expressing concerns about the company’s financial reporting.
• Nov. 5: The company announces preliminary fiscal 2025 first-quarter earnings that fall short of expectations, causing the stock to drop further.

Image source: Getty Images.

Current Situation at Supermicro

Supermicro’s preliminary first-quarter results have come in below expectations, with projected revenue between $5.9 billion and $6.0 billion, which is less than its earlier forecast of $6.0 billion to $7.0 billion. The company anticipates adjusted earnings per share between $0.75 and $0.76, slightly above the previous range of $0.67 to $0.83.

Looking ahead, management projects a decrease in revenue for the fiscal second quarter, estimating between $5.5 billion and $6.1 billion. The adjusted earnings per share for this quarter are expected to be between $0.56 and $0.65.

In light of the ongoing scrutiny, Supermicro’s Independent Special Committee concluded that the Audit Committee acted independently, stating:

[T]here is no evidence of fraud or misconduct on the part of management or the Board of Directors. The Committee is recommending a series of remedial measures for the company to strengthen its internal governance and oversight functions, and it expects to deliver a full report soon.

However, the company still lacks a timeline for submitting its 10-K and intends to adhere to Nasdaq’s compliance guidelines.

What Investors Should Look For

Supermicro has fallen two quarters behind in financial reporting. Since Hindenburg’s report, the stock has crashed over 50%, and it’s down 80% from an all-time high that occurred in March.

Now, the company needs to appoint a new auditor and should provide immediate clarity on how it plans to rectify these issues.

It’s crucial for management to finalize the 10-K filing and communicate a realistic timeline or explain the ongoing obstacles, something they have largely avoided during recent earnings calls. Despite assurances that there will be no significant changes to fiscal 2024 results, the various allegations and the resignation of EY suggest that financial restatements could also be on the table.

Advice for Potential Investors

Until there’s greater transparency from management and concrete steps toward compliance can be observed, it’s advisable to avoid Supermicro’s stock. Current shareholders may struggle with the decision to sell because the stock has already lost substantial value, yet the decline might not be over.

Trust is vital for Supermicro’s future, and if it falters, the situation could worsen. Reports indicate that Nvidia, a key supplier for Super Micro Computer, is redirecting its valuable chips to competitors, potentially in response to concerns about the company’s legal troubles.

Management must be forthright with investors moving forward. If unresolved issues persist by the end of the month, Supermicro risks delisting from the Nasdaq, which would further damage its reputation and business prospects.

Time is of the essence for Super Micro Computer, and decisive actions are needed now.

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Jeremy Bowman 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.