Stock Prices of SuperMicro Surge Following Committee Review; Appropriate to Invest in Shares Now?
Super Micro Computer (SMCI, up by 10.91%) has been on a rollercoaster ride this year, with its shares experiencing a surge following an independent committee's announcement of no wrongdoing in the company's accounting. The stock began the year strongly, quadrupling within the first three months, but then saw a decline due to accounting-related concerns, causing the shares to give back all their gains and more.
Lately, the stock has seen a substantial increase following the committee's report, currently showing a gain of around 45% for the year. However, keep in mind that the stock can be quite volatile, so its current status may have changed by the time you read this.
Let's delve deeper into Supermicro's stock performance and recent developments to decide whether it's time to invest or consider selling.
Accounting-related concerns
Supermicro's impressive early gains were driven by the company's strong growth in the artificial intelligence (AI) infrastructure sector. Supermicro designs and assembles servers and rack solutions for customers, and its ability to offer direct liquid cooling (DLC) for servers gave it a competitive edge. Graphic processing units (GPUs), such as those from companies like Nvidia, produce substantial heat and require effective cooling methods.
Prior to the accounting questions, Supermicro faced issues related to its gross margins, which tarnished its stock performance after its Q2 results. Supermicro's niche market and intense competition put more pressure on its already-narrow margins. The situation became even more challenging when Supermicro decided to reduce prices to gain market share, but did not cover the costs associated with expanding its DLC business.
As a result, Supermicro's stock began to struggle amidst margin pressures. Short-seller Hindenburg Research capitalized on this, accusing Supermicro of accounting manipulation and other misconduct. The stock experienced a significant drop in value following the report, and the situation was further worsened when Supermicro delayed the filing of its fiscal year 2024 annual report. The company had previously been found guilty of accounting manipulation in 2020 and was fined by the Securities Exchange Commission (SEC).
More pressure was applied to the stock in the fall when a report from The Wall Street Journal suggested that the Department of Justice (DOJ) was investigating the company. Neither the DOJ nor Supermicro have confirmed or denied the report.
However, the stock saw a brief recovery after Supermicro announced it was shipping more than 100,000 GPUs per quarter. This upswing was short-lived, though, as the resignation of its auditor, Ernst & Young (E&Y), a few weeks later led to another drop in the stock's value. E&Y released a harsh statement, stating they were "unwilling to be associated with the financial statements prepared by management" and that they had previously raised concerns about Supermicro's governance, transparency, and internal controls in July.
The stock continued to decline after Supermicro revised its fiscal Q1 outlook, projecting sales of $5.9 billion to $6 billion – significantly lower than its previous forecast of $6 billion to $7 billion. The company also forecast gross margins of about 13.3%, which was a sequential improvement from the 11.2% it saw in fiscal Q4. The stock saw a rally following the announcement that Supermicro had hired respected accounting firm BDO as its new auditor. Additionally, the special committee's report that found "no evidence of misconduct" provided an extra boost to the stock. However, the committee recommended replacing the company's CFO, David Weigand, and suggested adding several senior positions, including a chief accounting officer, chief compliance officer, and general counsel.
Is it time to invest?
The special committee's findings suggest that the accounting drama around Supermicro may not be completely resolved. The harsh resignation of E&Y does not conform to typical behavior of large accounting firms, and BDO will need to review the company's annual report and provide their certification. The dismissal of the company's CFO is also noteworthy, as the company had previously replaced its CFO following accounting fraud allegations.
While Supermicro continues to benefit from the AI infrastructure buildout, the accounting drama may impact its relationships with customers and suppliers. Is the potential for growth in the AI sector sufficient to outweigh the risks associated with the ongoing accounting controversy?
With its current price, Supermicro now trades at a P/E ratio of just over 11. That's a slightly higher multiple than it had earlier in the year, due to the narrow-margin, low-moat business model.
Considering the stock's impressive jump in price over a short period and the ongoing accounting concerns, it may be advisable to take a wait-and-see approach to investing in Supermicro at this time.
Given Supermicro's recent financial improvements and the committee's report, some investors might be interested in exploring options for financing or investing in the company. However, the accounting-related controversies and ongoing investigations might make it prudent to approach with caution and conduct thorough research before making any investing decisions regarding Supermicro's stocks or bonds.
Despite the volatility and controversies surrounding Supermicro, its competitive position in the AI infrastructure software sector could potentially be an attractive investment opportunity for those with a higher risk tolerance and a willingness to closely monitor developments. Investing in the company's stocks or bonds may require a well-thought-out strategy that considers the impact of potential market changes and Supermicro's continued efforts in addressing its accounting concerns.
