Shares of Super Micro Computer (NASDAQ: SMCI) have seen a significant decline following the company’s recent update on its fiscal first-quarter results and ongoing auditing issues. After experiencing remarkable growth earlier this year when the stock quadrupled in the first three months of 2024, shares are now firmly in negative territory year-to-date.

Let’s examine the key points from Supermicro’s latest report and what they might mean for investors.

Revenue Falls Short of Expectations

In its latest update, Supermicro revised its fiscal Q1 sales expectation to between $5.9 billion and $6.0 billion, down from earlier guidance of $6 billion to $7 billion. Although disappointing, it’s important to note that last year the company reported revenue of $2.1 billion. Therefore, even with this lower projection, revenue will still show nearly a threefold increase year-over-year.

The company anticipates adjusted earnings per share (EPS) to fall between $0.75 and $0.76, a decrease from the previous forecast of $0.67 to $0.83. Last year, adjusted EPS was $0.34 after accounting for a recent 10-for-1 stock split.

Gross margins, previously a concern for the company, are expected to improve to 13.3%. This figure is better than the prior quarter’s 11.2% and approaches the historical range of 15% to 17%. However, Supermicro operates in a low-margin sector compared to competitors like Nvidia and Broadcom, which maintain gross margins closer to 75%.

Looking forward to the second fiscal quarter, Supermicro predicts revenue will be between $5.5 billion and $6.1 billion, with adjusted EPS estimated between $0.56 and $0.65. Last year’s fiscal Q2 figures were sales of $3.66 billion and an adjusted EPS of $0.56.

On the auditing front, Supermicro reported that its Special Committee found no management fraud but will implement measures to enhance internal governance. However, the company has not indicated when it will file its overdue 10-K annual report, which was initially due on August 29.

With annual reporting pending, Supermicro is now at risk of being delisted by the Nasdaq. The exchange notified the company of its non-compliance on September 17, and Supermicro has 60 days to rectify the situation or provide a compliance plan. Currently, the stock faces serious delisting risks as it lacks an auditor following the recent resignation of Ernst and Young.

Previously, Supermicro was delisted in 2019 due to similar filing issues but regained its listing in 2020. A second delisting would move the stock to over-the-counter (OTC) trading, potentially removing it from the S&P 500, a list it recently joined.

Image source: Getty Images.

Should Investors Hold or Sell Supermicro Stock?

Supermicro is a legitimate player in the booming artificial intelligence (AI) infrastructure sector. However, ongoing accounting concerns, including the auditor’s resignation and a history of SEC violations related to financial practices, create uncertainty.

While the company benefits from the growing demand for AI infrastructure, it operates in a competitive, low-margin market. Industry reports indicate that DigiTimes Asia suggests Nvidia has redirected orders that would have gone to Supermicro due to the cloud of uncertainty surrounding it. A shift in supplier and customer relationships could have long-term negative impacts on the company.

Although some investors may view the depressed stock price as a buying opportunity, the prevailing uncertainties and risks advise caution. There are more reliable ways to invest in the AI infrastructure boom.

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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 recommends Broadcom. 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.