Things have gone from bad to worse for Super Micro Computer(NASDAQ: SMCI). After a scathing short report highlighted questionable accounting practices, the company’s auditor resigned, and it has not been able to file its annual report at its expected due date. The once-loved artificial intelligence (AI) stock is showing red flag after red flag with its business practices. Investors are acting rationally and exiting their positions.
As of this writing, Super Micro Computer stock is down 82% from highs set earlier this year, wiping out billions of dollars in shareholder value. Is the worst over for this stock? Or is the company facing potential accounting fraud?
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Super Micro Computer stock peaked back in March. It traded slightly lower to flat for a few months, which looked like a normal price correction after zooming up 250% in just a few short months. Proclaimed a winner of the AI spending boom, the company was posting gangbuster revenue growth as a builder of data centers for third parties. Other companies would come to Super Micro Computer to build efficient data centers with advanced computer chips from the likes of Nvidia.
Now, some of this revenue growth is being put into question. Allegations began on Aug. 27 when famous short-seller Hindenburg Research put out a short report alleging accounting manipulation, self-dealing with executive family members, and evading U.S. foreign sanctions by selling to restricted countries. Given Hindenburg’s strong track record, Super Micro Computer’s stock fell on this news.
The stock treaded water until the end of October. Then, its auditor, Ernst & Young, resigned, stating that it was unwilling to associate itself with management’s prepared financial statements. A public statement from an auditor like this is rare and damning. One could argue that auditors are typically too lenient with management teams. For example, the same auditor still validated Wirecard‘s financial statements, which ended up having Russian spies as a part of its fraud. Now, Super Micro Computer has delayed its quarterly filing with the Securities and Exchange Commission (SEC), which is driving the stock even lower.
With no SEC filings, Super Micro Computer is now at risk of getting delisted from the Nasdaq exchange. The company has 180 days to file its annual report past the due date once it formulates a plan with the Nasdaq regulators. If it doesn’t, the stock will get dropped from the exchange.
Disregarding these accounting and filing issues, Super Micro Computer’s business seems to be stagnating. The company expects to generate around $5.9 billion in revenue for the quarter ending in September compared to previous guidance of $6 billion to $7 billion. Gross margin is also a concern. Over the last 12 months, the company has generated a 14% gross margin compared to 18% in 2023. This declining margin will hurt Super Micro Computer’s ability to generate any significant cash flow for shareholders.
On the stated numbers, Super Micro Computer stock looks cheap. It has a trailing price-to-earnings ratio (P/E) of 9, which is dirt cheap for a fast-growing company that should benefit from the AI boom.
However, there is major doubt that Super Micro Computer’s financial statements are even accurate. Short-sellers are calling the company’s bluff, its auditor just resigned, and it can’t seem to come out with its own financial statements in a timely manner. All these developments happening in just a few short months should raise suspicions.
The stock is up over 700% in the last five years and has a single-digit P/E. That doesn’t matter though. No matter how cheap a stock looks, you can’t invest in a company if you have no idea whether the financial statements are accurate. Avoid buying the dip on Super Micro Computer stock — there is a major risk the stock will keep falling further from here.
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Brett Schafer 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.
