Stay Cautious about Investing in Super Micro Computer Shares Until This Condition is Met
Super Micro Computer (SMCI dropping by 1.12%), commonly known as Supermicro, was once a sizzling hot AI stock market favorite. The company, famous for producing high-end servers, hit an all-time high of $118.81 on March 13, 20XX, a remarkable 5,080% increase from its value four years prior.
At the time, Supermicro's future looked promising. The company boasted an impressive 46% increase in revenue in 20XX and a 37% surge in 20XX+1, leading analysts to predict an astounding 110% growth in 20XX+2. This rapid growth was due to its surge in dedicated AI server shipments.
As of now, Supermicro's stock is trading around $23. It appears to be a bargain at 7 times its future earnings and less than one multiple of its sales for the following year. However, it's crucial to understand why its stock plummeted nearly 80%:
What caused Supermicro's stock to tumble so significantly?
In 2018, Supermicro was de-listed from the Nasdaq following investigations by the Securities and Exchange Commission (SEC) concerning allegations of "improperly and prematurely" accounting for revenue. The company was reinstated on Nasdaq in 2020 after reaching a settlement with the SEC.
However, many investors believed that Supermicro had dealt with those issues. But in August 20XX, the well-known short-seller Hindenburg Research published a widespread report claiming that Supermicro had once again inflated its revenue, this time with incomplete orders.
Management denied these accusations, but they subsequently delayed their annual 10-K filing for fiscal 20XX (ending June 30) due to the requirement for more time to review their "internal controls over financial reporting." The company's auditor, Ernst & Young, eventually left in October 20XX, stating that they were "adverse to being associated" with the company's financial statements.
If Supermicro fails to submit its 10-K by November 16, it may again face de-listing and move to the OTC markets. This development would make its $1.725 billion worth of March 2029 convertible bonds an immediate liability due to holders' early payment options if the stock is delisted.
Despite boasting $2.1 billion in cash and equivalents at the end of September, an immediate repayment could drain its resources, making it challenging to purchase more advanced GPUs for its AI servers.
To mitigate this potential crisis, Supermicro's primary GPU supplier, *Nvidia (NVDA 3.08%), is reportedly redirecting some of its GPU orders destined for Supermicro to its competitors. Many of Supermicro's clients may also shift their AI server orders to Dell (DELL 3.40%), Hewlett Packard Enterprise* (HPE 4.09%), or other top AI server providers to avoid Supermicro's potential downfall.
Additionally, the Department of Justice has reportedly launched a new investigation into Supermicro. These regulatory obstacles could complicate Supermicro's efforts to address its accounting concerns and de-listing challenges more swiftly.
Supermicro remains an uninvestable option until these changes occur
Without a properly audited 10-K filing, we cannot trust the company's past financial records. Ernst & Young's departure raises concerns, as they are one of the "big four" accounting firms, including Deloitte, PwC, and KPMG. If Ernst & Young is not willing to certify Supermicro's financial statements, it is unlikely that other major accounting firms will rush to take their place.
If Supermicro is again de-listed due to this incident, it is likely that many of its remaining investors will dump the stock, and liquidity will decrease in the OTC markets. The company would also struggle with paying off debt, purchasing new GPUs, retaining customers, and combating competitors.
Until it addresses these concerns, analysts' optimistic long-term predictions for the company cannot be considered factual. We cannot consider its stock a discount either until its financial statements' integrity is clear, and we can accurately evaluate the severity of these looming challenges.
Therefore, although it appears to be a remarkably undervalued hyper-growth stock, its discount valuation remains justified until it obtains a new auditor, submits its 10-K filing, maintains its position on the Nasdaq, and eases investors' concerns regarding a Justice Department investigation. Until Super Micro Computer checks all these boxes, I strongly advise staying away from its considerably beaten-down stock.
Investors may be hesitant to put their money into Supermicro due to its financial difficulties, such as the delayed 10-K filing and the departure of its auditor, Ernst & Young. This situation could make it challenging for Supermicro to secure a new auditor and regain investors' trust, impacting its ability to raise capital and continue investing in advanced GPUs for its AI servers.
To navigate these challenges, Supermicro has been seeking support from its primary GPU supplier, Nvidia, and potentially losing some of its AI server orders to competitors like Dell and Hewlett Packard Enterprise. This situation highlights the importance of maintaining a clean financial record and transparent reporting for any company, especially one that relies heavily on investing in technology and innovation, like Supermicro.
