(Bloomberg) — What was one of Wall Street’s hottest artificial intelligence plays has been pummeled by bad news, with dip buyers staying away as accounting questions hang over the stock.
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Super Micro Computer Inc. shares are on pace for their worst month in nearly six years after allegations of accounting problems by a short-seller and a delayed 10-K filing for which the company said it needed more time to assess its internal controls. A disappointing earnings report earlier in August also roiled the stock.
It’s a sudden turnaround for a key beneficiary of spending on AI infrastructure. Added to the S&P 500 Index in March, Super Micro shares have since dropped 64% below a peak hit that month. The stock is down as much as 36% this week, including Friday’s drop of as much as 6.5%.
Hindenburg Research on Tuesday said it is short the company, as an investigation revealed “glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.” On Wednesday, the firm said it will delay filing its annual financial disclosures.
A spokesperson for Super Micro declined to comment on the Hindenburg report. Reached for a comment about the filing delay, the spokesperson said that “additional time is needed to assess some internal controls,” and that the company hasn’t updated the announced financial results for its most recent fiscal year and quarter.
“The 10-K delay is only adding to the uncertainty, even if AI servers remain a tremendous business,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services. “I can see the stock going significantly lower from here.”
Other analysts are souring on the stock. Bank of America on Thursday moved its rating to under review, writing that “the delay in filing and any potential findings from the review leads to more uncertainty, and leaves us unable to assess the fundamentals of the company.”
That followed CFRA, which downgraded Super Micro after Hindenburg’s report. “While we believe the evidence presented does not conclusively demonstrate significant accounting malpractice or verifiable sanction evasions, SMCI’s delayed 10-K filing and potential reputational damage raises concerns,” it wrote.
Few are enticed by a valuation that has plummeted to levels that could be attractive under other circumstances. Shares trade below 12 times estimated earnings, a fraction of a recent peak near 40, and a discount to its 10-year average.
In terms of estimated revenue, Super Micro trades at 0.9 times, making it the third-cheapest stock in the Nasdaq 100 Index by this metric. Two of the most expensive, in contrast, are also connected to AI: Nvidia Corp. trades at 19 times estimated revenue and Arm Holdings Plc tops the list at more than 30 times.
Kaufman said the delayed filing exacerbated his broader concerns about how long spending on AI infrastructure will continue to grow at elevated rates. This issue contributed to a 6.4% drop in Nvidia Corp. on Thursday, after the AI-focused chipmaker gave a forecast that failed to live up to the most optimistic hopes.
This is not the first time Super Micro has faced questions over its accounting. In 2020, the company resolved an investigation by the US Securities and Exchange Commission into its accounting and disclosures for its fiscal years 2014-2017 by correcting its financial statements and paying a penalty, while promising not to commit such violations in future.
For many, that episode was forgotten as AI took Wall Street by storm. Super Micro sells high-powered servers for data centers, and it has seen an explosion in both sales and investor interest. Revenue growth topped 140% in its most recent quarter, when it also gave a sales forecast that was much stronger than expected. Revenue is seen tripling this quarter, according to data compiled by Bloomberg.
The stock, which soared nearly 250% in 2023, continues to have some defenders. Rosenblatt Securities wrote that “a 10-K delay is not a good look, obviously,” but that “the business remains strong and healthy, and there have been no changes to the company’s financial results.” The selloff, analyst Hans Mosesmann added, “seems over the top.”
Of course, investors who want exposure to AI servers have other options, including Dell Technologies Inc., which on Thursday reported better-than-expected revenue on the back of AI server growth. Dell gained 3.4% on Friday.
While there’s a chance this could turn out to be a buying opportunity for investors, “that’s still an unknown, and there’s no reason to take that risk when Dell also looks cheap, is also well positioned in servers, and doesn’t have these red flags,” said Adam Sarhan, chief executive officer at 50 Park Investments. “It will take time for Super Micro to earn back confidence, and while you can jump in now, it would really be swim at your own risk.”
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–With assistance from Jeran Wittenstein.
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