Super Micro Computer (NASDAQ: SMCI) started the year off with a bang. The stock soared 188% in the first half, even surpassing the performance of market darling Nvidia, and was invited to join both the S&P 500 and the Nasdaq-100. And for good reason. Earnings have soared at the equipment maker, thanks to demand from artificial intelligence (AI) customers.
The company sells workstations, servers, and other products essential for AI data centers. And considering forecasts for AI market growth — today’s $200 billion market is expected to reach $1 trillion by the end of the decade — the future looks bright too. But a few pieces of news in recent times have weighed on the company, and the stock has dropped nearly 30% since late August.
From a short report alleging troubles at the company to an article in The Wall Street Journal about a possible Justice Department probe, Supermicro has faced headwinds in recent times. So, if you’re a shareholder or potential shareholder, you may be wondering what to do. Before buying or selling, here’s what you need to know.
The Hindenburg report
The Hindenburg Research short report was published on Aug. 27. Hindenburg, following a three-month investigation, alleges “accounting red flags,” “evidence of… export control failures,” and other troubles at Supermicro.
It’s important to note that Hindenburg has a short position in Supermicro stock, meaning it benefits from any declines in the share price. In short selling, an investor borrows shares of a particular company, sells them — then ideally buys them back at a lower price to return to their original owner. Because of this position, Hindenburg has a bias toward the stock’s decline, making it difficult to rely on the firm as a source of information.
Supermicro responded to the report, calling statements “false or inaccurate,” and saying it would address them “in due course.”
In unrelated news, but around the same time as the Hindenburg report, Supermicro informed the market that it was delaying the filing of its 10-K annual report — a move that made some investors worry about potential changes to earnings figures. But Supermicro followed up by saying it didn’t expect any significant adjustments to its fourth-quarter or full-year numbers.
A new element of uncertainty
The comments addressing both of these issues should ease investors’ minds. But a third piece of news, just this past week, offered another element of uncertainty. The Wall Street Journal, citing people familiar with the matter, reported the Justice Department had launched a probe into Supermicro following the Hindenburg report.
The probe still is in the early stages, the WSJ reported, with a prosecutor from the U.S. attorney’s office in San Francisco recently contacting people who may have “relevant information.” Supermicro and the U.S. attorney’s office declined to comment, the Journal said.
Following this newspaper report, Supermicro shares fell 12% in one trading session.
So, now you may be wondering if this top AI equipment maker is really in trouble — and if you should stay away from the stock or sell. Or you may wonder, considering the recent decline in valuation, if this is an opportunity to get in on a recovery story at a good price.
Take a long-term view
Well, first, it’s important to remember that a Justice Department probe hasn’t been confirmed — and even if it is confirmed, this doesn’t mean Supermicro has done anything wrong. And, if we imagine a more difficult scenario, one in which a probe happens and potential problems are found, this wouldn’t necessarily spell disaster over the long term. So, it’s essential to follow the story and take a long-term view when considering any developments — positive or negative.
And if you’re a shareholder, avoid panic selling. Consider the facts, and again think of how they may impact the company over the coming five to 10 years. At the moment, from what we know, the future remains bright for Supermicro. The company has a solid track record of earnings growth, its products are in high demand, and growth of the AI market suggests Supermicro’s earnings growth could continue for quite some time.
Now, if you’re not yet a shareholder, should you buy the stock or wait? Very aggressive investors may see this as a good time to pick up a few shares of Supermicro, as it’s trading for about 11x forward earnings estimates, which is very cheap for a growth stock.
Still, most investors would be better off staying on the sidelines — temporarily — until we know more about the current issues. After all, Supermicro did say it would further address the statements in the Hindenburg report, and those words could ease investors’ minds.
All this means that, yes, there’s reason to be optimistic about Supermicro over the long term, but with some uncertainty weighing on the shares right now, it may be best to wait for some of those clouds to lift before buying.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Super Micro Computer Stock Has Fallen 30%. Before Buying or Selling, Here’s What You Need to Know. was originally published by The Motley Fool
