Super Micro Computer(NASDAQ: SMCI) stock has been on a roller-coaster ride in recent months. The tech stock has quickly gone from a hot artificial intelligence (AI) play to becoming a risky investment that may not only get the boot from the S&P 500, but could also end up getting delisted. Over the past six months, the company has lost nearly 60% of its market value.
But since the tech company announced a new auditor in BDO (the previous one resigned over concerns relating to internal controls), there appears to be hope. While the stock is still a long way from recouping those significant losses, the market does appear to be more optimistic. So the question is: Is it safe to invest in Super Micro stock again?
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Super Micro Computer’s annual report, its 10-K filing, was due on Aug. 29, and the company has yet to file it. Providing audited financials can take time for a company, especially when the auditor is new, as opposed to an auditor who is already familiar with the business.
More importantly, however, with the appointment of BDO, Super Micro has submitted a compliance plan with the Nasdaq that should keep the exchange happy for the time being, and prevent the stock from getting delisted.
While investors appear to be cheering the news of the compliance plan with the stock rallying in recent days, it’s just a temporary reprieve. BDO will still need to do a deep review of the company’s financials. There is no guarantee the auditor will be content with the internal controls in place, nor be willing to sign off on Super Micro’s annual report.
Super Micro may be behind on filing its annual and quarterly reports, but that hasn’t stopped it from posting preliminary numbers. On Nov. 5, the company released preliminary financial information for the first quarter of fiscal 2025 (that ended on Sept. 30), stating that its net sales would be around $5.9 billion to $6 billion. This is at the lower end of the guidance it previously issued, where it expected sales of around $6 billion to $7 billion.
While that may be low in terms of reaching its guidance, it still represents an increase of around 180% from the same period a year ago, when sales totaled $2.1 billion. Another positive is that the company says its gross profit margin will be at 13.3%, which is an improvement from the 11.2% margin it reported in the previous quarter.
But should investors truly rely on Super Micro’s numbers if there have been significant enough concerns over the company’s controls and processes that its previous auditor resigned over them? Its preliminary numbers still show incredible growth, but with some dark clouds over the business right now, I would hesitate to put a lot of trust in these results.
Super Micro appears to still be growing at a fast pace, but if it has to change its processes and controls, that could affect how it recognizes revenue. That would affect its bottom line and valuation as well.
One important thing investors must understand is the server hardware business has extremely thin margins. While the top line improved in Q1, there isn’t much room for Super Micro to take a hit to its financials and still appear to be a cheap buy. Right now, it looks like a bargain, trading at just 11 times next year’s earnings (based on analyst estimates). The stock could look like a downright steal of a deal today, given the growth in AI and the demand for servers.
But that’s only if you trust the company’s numbers, and right now, that’s still a big question. If the business has to restate its financials and adjust its reporting process, that could change how strong its earnings numbers look, and Super Micro could quickly go from being a cheap stock to becoming a very expensive one.
The company may have a new auditor, but there’s still a significant risk for this to be a tenable option for most investors.
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