Super Micro Computer Stock Faces Challenges But Shows Potential

This year has seen Super Micro Computer (NASDAQ: SMCI) experience significant stock fluctuations. Initially, the company had a strong start, but shares began to decline after a report from Hindenburg Research claimed accounting manipulation. The situation worsened when Supermicro delayed the filing of its 10-K annual report.

The Wall Street Journal also reported on a Department of Justice (DOJ) investigation into possible accounting issues link to the company, though neither Supermicro nor the DOJ confirmed these claims.

After a series of ups and downs, the stock rebounded when Supermicro announced it had shipped over 100,000 graphic processing units (GPUs) each quarter. However, the stock later declined due to the resignation of its auditor, Ernst and Young, creating pressure on the company to find a new auditor quickly to avoid delisting from the Nasdaq Stock Market.

A preliminary announcement regarding Q4 numbers fell short of expectations, adding to the stock’s struggles. Yet, with the hiring of a new auditor, investors’ confidence started to return.

As of now, Supermicro’s stock is down approximately 7% for the year, but it has a history of making significant moves in the market. Given its recent challenges, it’s important to assess whether the current stock price offers a good investment opportunity.

Supermicro Secures New Auditor

The appointment of BDO as its new auditor led to a remarkable 30% surge in Supermicro shares. This followed Ernst and Young’s resignation, which was highlighted by a stern statement expressing concerns about Supermicro’s financial management and overall governance.

Ernst and Young only served as Supermicro’s auditor since March 2023 when they replaced Deloitte & Touche. Bringing in BDO, one of the top five accounting firms globally, is seen as a significant benefit for Supermicro. A company statement emphasized the urgency of updating their financial statements to restore credibility.

Along with naming a new auditor, Supermicro has submitted a compliance plan to Nasdaq, seeking an extension to maintain its listing. Should delisting occur, it would move to the over-the-counter (OTC) market, jeopardizing its recent entry into the S&P 500 index.

Image source: Getty Images.

Assessing Investment Potential in Supermicro

Supermicro has positioned itself as a key player in the booming artificial intelligence (AI) infrastructure market by designing and assembling the necessary server systems. Its pioneering approach to direct liquid cooling (DLC) solutions has set it apart, addressing overheating concerns in high-performance systems.

However, Supermicro operates in a competitive field with narrow profit margins. Recent revenue reports highlighted margin challenges, although the company achieved an 18% year-over-year revenue increase last quarter, even if it fell short of earlier projections.

The company’s current forward price-to-earnings (P/E) ratio stands around 9.5, indicating relative value given its growth trajectory. This appears attractive compared to numerous similar firms.

That said, Supermicro’s recent governance issues raise flags, particularly the SEC’s past fines related to its accounting practices, the short report, and the auditor resignation. Yet, with demand high for its services, any past discrepancies might not severely hinder its future performance.

For risk-tolerant investors, it may be worth considering a small stake in Supermicro, given its low valuation and strategic role in AI assistance. Still, caution is advised.

Is Investing $1,000 in Super Micro Computer a Sound Decision?

Before purchasing shares of Super Micro Computer, take this into account:

The Motley Fool Stock Advisor team has identified their top 10 stocks to invest in right now, and Super Micro Computer was not included. The selected stocks are expected to provide significant returns over the coming years.

Consider a past recommendation of Nvidia, which has generated huge returns. A $1,000 investment made when the recommendation was published would be worth approximately $869,885 today!*

Stock Advisor offers an accessible roadmap for investors, featuring portfolio-building guidance, ongoing updates, and two fresh stock picks each month. Since its inception in 2002, the service has outperformed the S&P 500 by more than four times.*

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.