Super Micro Computer(NASDAQ: SMCI) started the year off as a star of the artificial intelligence (AI) market. The equipment maker has been around for more than 30 years, selling servers and rack scale solutions, but it truly saw earnings take off with the AI boom. In recent quarters, Supermicro has reported triple-digit increases in revenue and soaring demand for its products. The company works hand-in-hand with Nvidia and other top chipmakers, incorporating their innovations into its equipment.
All this helped the stock rise 2,000% over the last five years through 2023, and even beat Nvidia’s performance in the first half of this year, gaining 188%. Then, in late August, troubles emerged that began to weigh on this top stock. From a short report alleging problems at the company to the recent resignation of Supermicro’s auditor, these times have been difficult for Supermicro and its investors. Since the Aug. 27 short report, the stock has dropped about 60%.
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More news arrived this week, with Supermicro releasing a preliminary and unaudited quarterly earnings report and a general update. Here’s what you need to know before making any investment decisions.
Image source: Getty Images.
First, let’s consider the elements that have been weighing on the stock. It all began with a short report from Hindenburg Research, alleging troubles at the company such as “glaring accounting red flags.” Since Hindenburg had a short position in the stock at the time of the report, meaning it would benefit from declines in the stock, it held a bias. That makes it impossible to fully rely on Hindenburg as a source.
Meanwhile, Supermicro delayed the filing of its 10-K annual report. This may not have been a clear reason to sell or avoid the stock, but it still weighed on investors’ minds.
Supermicro addressed both the Hindenburg report and the 10-K delay in a letter to customers, offering encouraging words. Regarding the short report, Supermicro called the statements “false or inaccurate,” and concerning the 10-K delay, the company said it didn’t foresee any significant changes to its fourth-quarter or full-year earnings.
But investors’ concerns deepened when an article by The Wall Street Journal spoke of a potential Department of Justice probe into Supermicro — Supermicro declined to comment — and when Ernst & Young resigned as Supermicro’s auditor.
In its resignation, Ernst & Young said it would “no longer be able to rely on management’s and the Audit Committee’s representations” and it was “unwilling to be associated with the financial statements prepared by management.”
Now, let’s get to the update from Supermicro. Ernst & Young initially expressed concerns about internal controls in July, and Supermicro’s board formed an independent committee to review the situation. This special committee completed its investigation and issued a statement during the Supermicro earnings report this week, saying “the Audit Committee has acted independently and that there is no evidence of fraud or misconduct on the part of management or the Board of Directors. The Committee is recommending a series of remedial measures for the Company to strengthen its internal governance and oversight functions[.]”
Meanwhile, Supermicro says it continues to work on its 10-K, but can’t yet predict when the report will be ready. This is a concern because the company faces the risk of delisting by the Nasdaq if it doesn’t file the report or submit a plan addressing the situation later this month. Supermicro received a letter of non-compliance from Nasdaq in September.
At the same time, moving along to unaudited fiscal first-quarter earnings, the company says it expects net sales of $5.9 billion to $6 billion, down from earlier guidance of $6 billion to $7 billion. This still represents a triple-digit gain year over year — and Supermicro’s work with partners and its progress on a new production center in Malaysia are running smoothly.
The company says it expects its direct liquid cooling (DLC) market share this fiscal year to be at least 10 times greater than it was last year as the AI market takes on the technology that cools data systems and data centers. Supermicro says its Nvidia GB200 NVL72, a Blackwell-powered rack scale solution, “is ready,” and the company’s Advanced Micro Devices‘ MI300 and MI325 platforms and Intel Gaudi 3 solutions are too.
Though there have been reports of Nvidia shifting its orders to other vendors, Supermicro said during its call with analysts that there’ve been “no changes to allocations.”
Finally, the Malaysia facility, expected to open later this quarter, will help Supermicro increase volume and lower costs — that’s good news for margins.
Considering all of this, what should investors do? Supermicro has become a leader in its industry in recent years, and the company might continue to thrive in this high-growth environment once it traverses these difficult waters. But in spite of this positive point, it’s impossible to draw a clear picture of the future when questions exist about internal controls and financial reporting. Before investing in a company, it’s critical to have faith in management and understand that company’s financial situation.
That means investors can’t wisely invest in Supermicro right now — no matter how promising the market and the company’s technology look. But this doesn’t mean you should completely forget about this AI giant. Instead, it’s best to keep an eye on how this story unfolds and only make investment decisions when all of the facts are in.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
