Earlier this year, Super Micro Computer(NASDAQ: SMCI) reigned with Nvidia as the market’s best-performing stocks. Supermicro advanced 188% in the first half, while Nvidia climbed 149%.
Why did this 30-year-old company suddenly jump into the limelight? The equipment maker, providing elements like servers for artificial intelligence (AI) data centers, saw its earnings soar amid the AI boom.
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But this growth story dimmed in recent times as troubles for the company started piling up, and all of this has led to a more than 60% drop in the stock since late August. A short report alleged problems at Supermicro, a newspaper article spoke of a possible Justice Department investigation, and just recently, Supermicro auditor Ernst & Young resigned from the job.
At the same time, Supermicro has fallen behind in financial reporting, and several weeks ago, it said its 10-K annual report would be late. And just this week, the company said it would be unable to file its report for the quarter ended Sept. 30 on time. Did Supermicro’s troubles just deepen?
Image source: Getty Images.
First, a bit of detail on the various headwinds, starting with the short report, released in late August. In the document, Hindenburg Research alleged a variety of troubles, including “glaring accounting red flags.” It’s important to keep in mind that at the time of the report, Hindenburg held a short position in Supermicro, so it would benefit if the stock fell. This bias makes it difficult for investors to rely on Hindenburg as a source of information regarding the equipment maker.
The Wall Street Journal later reported of a probe into Supermicro launched by the Justice Department. Both the U.S. attorney’s office and the company declined to comment.
Finally, auditor Ernst & Young, after questioning the company’s internal controls back in July, recently resigned, saying it’s “unwilling to be associated with the financial statements prepared by management.” The Supermicro board appointed an independent special committee to review the situation, and just recently, the committee said, “there is no evidence of fraud or misconduct on the part of management or the Board of Directors.” Though the committee hasn’t officially completed its review, these words represent some good news for Supermicro and its shareholders.
Meanwhile, Supermicro informed the Securities and Exchange Commission (SEC) that it would be late filing its 10-K annual report, a move that prompted Nasdaq to send the company a non-compliance letter. Supermicro now has until Nov. 16 to either file or present a plan to regain compliance. Non-compliance eventually results in delisting, an outcome that definitely would be bad news.
If Supermicro were delisted, the shares would trade over the counter (OTC). Volume is lower on the OTC market and transaction costs are higher, and this could weigh on demand for the stock. On top of this, a delisting would further shake investors’ confidence in the company’s management.
Now we come to the latest news: This week, Supermicro said it also wouldn’t be able to file its 10-Q quarterly report on time. This isn’t necessarily a surprise since the company doesn’t have an auditor right now and it must hire one to review the financial statements included in the 10-Q. As Supermicro noted in its declaration to the SEC, the 10-Q can’t be filed before the 10-K annual report.
Does this mean troubles have deepened for Supermicro? Not necessarily.
As mentioned, it was clear that without an auditor, Supermicro would be left at a standstill when it comes to financial reporting. So the company’s troubles today are the same as they were when Ernst & Young resigned a couple of weeks ago.
From here, what could help Supermicro in the near term is to find a new auditor so that the company may progress with its reporting. Without that, it will be very difficult for Supermicro to continue to attract investors. After all, investors want to have a clear picture of a company’s financial situation before getting in on a stock. And without an auditor and therefore a filing of financial reports, Supermicro may be on the road to a Nasdaq delisting — another situation that will hurt demand for the stock.
Though Supermicro has become a leader in the AI equipment market and could have a bright future ahead, all of these elements add way too much uncertainty to the story right now. As an investor, the best thing you can do is keep this player on your watch list — potentially for a moment in the future when the situation improves — and monitor this story from the safety of the sidelines.
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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.
