Super Micro Computer (NASDAQ: SMCI) has been one of the most volatile stocks in 2024. It started the year with a stunning 300% gain over just three months, but the stock has been declining since March following a series of worrying headlines.
The biggest shocks for investors have come in the past few months as Supermicro’s accounting practices are called into question. And the latest piece of news was enough for me to completely exit my position in the stock.
Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
Supermicro is benefiting significantly from artificial intelligence (AI) tailwinds. It builds full-scale servers and other components that are sold to companies looking to expand their AI computing power. Although it hasn’t received quite the same press as Nvidia, it remains one of the biggest winners among AI stocks.
Its top line has exploded with revenue up 143% year over year to $5.3 billion in its fiscal 2024 fourth quarter (ended June 30), and management previously guided for 74% to 101% growth in fiscal 2025.
Unfortunately, some investors may have trouble trusting those numbers.
Supermicro’s most serious problems kicked off when Hindenburg Research released a short report on the company in late August. In its report, the firm accused Supermicro of accounting malpractice, reminding investors of the $17.5 million penalty the company paid in a 2020 settlement to the SEC over similar accounting violations.
To make matters worse, management announced the day after the short report that it was delaying the filing of its form 10-K to assess the “design and operating effectiveness of its internal controls over financial reporting.” This news was followed by reports that the Department of Justice had launched its own probe into the company.
These developments sent the stock plunging, and I picked up shares of Supermicro during this time, believing the risk was worth the potential reward given the very real boom in AI computing demand. However, I kept my position size small at about 1% of my portfolio.
The problem is, it’s looking more and more like Hindenburg’s short report may be accurate.
Supermicro still hasn’t filed its 10-K, so investors don’t know what changes or restatements (if any) are going to occur. However, one firm has seen its financials: Ernst & Young, its financial auditor.
Ernst & Young resigned from its position as Supermicro’s auditor last month, saying they were “unwilling to be associated with the financial statements prepared by management.” In other words, the auditor is saying they don’t trust what management is telling them. This is about as big of a red flag for a company as you can get. If you can’t trust the financials a company is reporting, then you can’t trust anything they do or say.
