Super Micro Computer Faces Major Challenges Amid Governance Concerns

Super Micro Computer stock (NASDAQ: SMCI) dropped about 6% in trading on Tuesday and has seen a 54% decline over the past month due to serious corporate governance issues and scrutiny over its financial reporting. Hindenburg Research released a report that highlighted numerous concerns about SMCI’s accounting practices. Additionally, the company postponed filing its annual financial statement in August for the last fiscal year, placing it out of compliance with Nasdaq exchange rules, which mandate timely filings with the U.S. Securities and Exchange Commission (SEC). Super Micro now has a crucial deadline on November 16th to either submit the overdue report or present a plan for restoring compliance. Failing to meet this deadline could lead to delisting from Nasdaq. Adding to the company’s challenges, its auditor, Ernst & Young, resigned in October, stating it would not associate with Super Micro’s financial statements. The company now needs to secure a new auditor to file an audited 10-K report or convincingly demonstrate its financial integrity to the SEC.

Stock Performance: A Roller-Coaster Ride

Over the last three years, SMCI stock has outperformed the broader market. The stock surged by 39% in 2021, 87% in 2022, and an astounding 246% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, which consists of 30 stocks, has shown considerably less volatility while outperforming the S&P 500 each year in the same timeframe. This raises the question: why does the HQ Portfolio achieve better returns with less risk? Overall, these stocks present more stable performance compared to the benchmark index. Given the significant concerns raised about SMCI, investors must carefully consider their position in the stock.

A Pattern of Compliance Issues

Historically, Super Micro has experienced similar challenges. The company was delisted from Nasdaq in 2018 following an SEC investigation into its revenue recognition practices and was only relisted two years later after reaching a settlement with the Commission. The current circumstances may signal a potential repeat of this history. With nearly $15 billion in revenue last fiscal year, Super Micro is a substantial entity likely to require auditing from one of the Big Four accounting firms—Ernst & Young, Deloitte, PricewaterhouseCoopers, or KPMG. However, given Ernst & Young’s refusal to sign off on SMCI’s accounts, it’s uncertain whether any of the other major firms would agree to take on the potential risks involved.

Strong Demand Amid Financial Uncertainty

Super Micro Computer specializes in selling server systems, management software, and installation services. The company has thrived in the generative AI sector, experiencing a surge in demand for its servers alongside industry leader Nvidia. Revenues more than doubled during FY’24, with forecasts anticipating an 80% increase in revenue for the current fiscal year. Despite these growth prospects, the stock trades at just 6.5 times its forward earnings—a low multiple given the company’s high growth rates. However, due to the many existing uncertainties around its financial reports and potential inaccuracies, it may be prudent to steer clear of SMCI stock for now. The possibility of delisting could lead to additional sell-offs in the near future, creating even more volatility.

[1] Returns as of 11/13/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.