Despite dropping approximately 80% from its peak, is Super Micro Computer stock a worthwhile investment now?
Super Micro Computer (SMCI dropping by -4.64%) might just be the most intriguing stock tale of 2024, sadly not for positive reasons. The year began with the stock sizzling as demand for its products soared, but soon plummeted due to heightened expectations. The real blow came when accusations of accounting irregularities surfaced, further damaging the company's reputation and stock price.
The share price has plunged more than 25% for the year and over 80% from its all-time high, established earlier this year. Given such a steep decline, some investors might ponder if this stock has any worth.
Even though I acknowledge the stock could potentially hold some value, there are numerous warning signs sprinkled around this company that should not be disregarded.
2024 has been a rollercoaster ride for Supermicro
Headquartered in San Jose, California, Super Micro Computer (commonly known as Supermicro) is a key player in the manufacturing of server components and full-scale racks. Its diverse product lineup allowed it to capitalize on the same growth drivers that propelled AI titan Nvidia (NVDA losing -1.14%), leading some to consider Supermicro as a beneficiary of the AI boom, akin to Nvidia.
This theory proved valid at the start of the year, with Supermicro's stock skyrocketing 318% (an astonishing quadrupling) in just a few months.
However, the stock began to slide as expectations for the company outpaced its performance. The sharpest drop occurred following the release of a short report from renowned short-selling firm Hindenburg Research, targeted at Supermicro for accusations of accounting malpractice. To exacerbate matters, Supermicro announced it would delay the filing of its year-end 10-K form to assess the "operating effectiveness of its internal controls over financial reporting," on the day after the Hindenburg report hit the headlines.
These claims also led to an investigation by the Department of Justice, never a good omen.
Although this series of events is undeniably a red flag, an even more worrying flag is that Supermicro has been embroiled in similar issues before. In 2018, Supermicro was temporarily booted off the Nasdaq stock exchange due to late filing of financial statements and was penalized by the Securities and Exchange Commission for previous accounting irregularities, a risk that could resurface should its current issues remain unresolved.
This pattern raises a few red flags, making Supermicro a stock that requires cautious consideration. However, the most alarming development in this ongoing saga might be the most recent one, and it's far from reassuring.
Preliminary Q1 results weren't promising, even if you trust management's statements
Supermicro's financial performance throughout 2024 has been commendable, if you trust what management says. But Supermicro's auditor, Ernst & Young, disagrees.
Ernst & Young, Supermicro's auditor, withdrew its association with management's financial reporting, stating that it was "unable to sign off" on the information. This is a major red flag for investors, especially considering auditors have access to information that the general public does not. If they're cutting and running, investors should probably consider doing the same.
Post this news, I sold all my shares. Even if this issue is rectified, investors may remain wary of the company due to its untrustworthiness.
Moreover, Supermicro reported preliminary first-quarter fiscal year 2025 (ending Sept. 30) results, which were less than impressive. Initially, management had projected quarterly revenue between $6 billion and $7 billion. Now, they expect revenue to fall between $5.9 billion and $6 billion. For the second quarter, revenue is projected between $5.5 billion and $6.1 billion, significantly below the pace needed to meet management's yearly target of $26 billion to $30 billion in revenue.
The origin of this revenue discrepancy remains unknown. Is it a consequence of Supermicro's accounting being straightened out, or is business taking a hit? Regardless, it's not the news investors are looking for.
If everything is set right, Supermicro's stock may harbor some value, but given the murky water, it's probably too uncertain for most investors to venture into. With numerous better investment opportunities available, it's likely that investors would be better off exploring some of those, rather than gambling on Supermicro.
Despite the appealing potential of Supermicro's stock, given its involvement in the AI boom and its high performance at the start of the year, the numerous red flags raised by accounting irregularities, investigations, and the withdrawal of its auditor's association with its financial reporting, make it a risky investment choice. In light of these issues and the availability of more reliable investment opportunities, many investors might choose to look elsewhere.
Given the company's history of accounting irregularities and its recent struggles with financial reporting, some investors might hesitate to invest in Supermicro despite its potential profitability, preferring to park their money in more financially stable and transparent investment options.
