Could Super Micro Computer potentialize one's fortune as a Millionaire-Level Investment Option?
When I consider stocks with the capacity to make millionaires, I often visualize rapid-growing companies with modest valuations – traits that Super Micro Computer (SMCI) possesses in abundance. Nevertheless, the data center hardware manufacturer is low-priced for a certain reason. Let's evaluate whether or not the company can surmount its immediate accounting hurdles to unlock extraordinary shareholder value.
Returning to a prosperous path?
Troubles for Supermicro began on August 7, when critical short-seller group Hindenburg Research published a damning report alleging accounting connivances, self-dealing, and evasion of sanctions related to the Russian invasion of Ukraine. Later, the company postponed releasing its annual report, threatening its delisting from the Nasdaq Stock Market.
Matters deteriorated further when Supermicro's former auditor, Ernst & Young, announced its exit on October 30, citing extended disputes with management and unwillingness to associate with its financial statements. Overall, these developments caused havoc on the stock, leading to a 76% drop year-to-date from its all-time high of $119 hit in March. However, the company appears to be making headway in overcoming some of these obstacles.
On November 19, Supermicro appointed a new auditor, BDO, to assist in filing its annual report and implement its plan to reclaim compliance with the Nasdaq and prevent delisting.
While there remains uncertainties since the Nasdaq is yet to approve Supermicro's plans, success could elevate the company's valuation. A delisting would harm the company's liquidity and render its shares less enticing to mainstream asset managers, who typically steer clear of stocks listed on less regulated, over-the-counter exchanges.
Business remains thriving
The sooner Supermicro's accounting predicament is rectified, the sooner investors will embrace its exceptional fundamentals. And the figures show promise. Earlier this month, management published an unaudited update from its independent special committee disclosing preliminary financial data associated with its fiscal first quarter.
Sales are projected to range between $5.9 billion and $6 billion. Even though this is significantly lower than the initial projection of $6 billion to $7 billion, it represents a 180% year-on-year growth compared to the preceding period. Moreover, Supermicro boasts several catalysts for continued expansion.
As a server manufacturer, the company converts AI graphic processing units (GPUs) manufactured by companies like Nvidia and Advanced Micro Devices into consumer-ready computer servers. This niche enables it to capitalize on high-demand products from its suppliers, such as the anticipated ramp-up in production and sales of Nvidia's Blackwell AI chips in 2025. These chips showcase impressive speed and efficiency improvements over previous Nvidia chips, making them potentially indispensable for companies aiming to maintain industry relevance. Additionally, AMD plans to release another generation of AI chips named Instinct MI325X, designed to rival Nvidia's Blackwell.
The valuation is remarkable -- but don't overdo it
With a forward P/E (price-to-earnings) ratio of just 6.3, Supermicro's stock is astoundingly cheap in relation to its triple-digit growth rate. However, investors should view its unaudited first-quarter figures with caution. Despite the uncertainty surrounding the company, its billionaire-maker potential becomes apparent if and when accounting-related complications are resolved.
Nevertheless, Supermicro's core operations are not untouched by potential setbacks. The legal and regulatory challenges confronting the company could prompt suppliers and customers to divert orders to steer clear of potential disruptions. Investors should meticulously analyze the pros and cons before contemplating a position in the stock.
Despite the accounting issues facing Supermicro, investors might want to consider reinvesting in this company due to its potential for extraordinary shareholder value. The company's forward P/E ratio of 6.3 is remarkably low given its triple-digit growth rate, indicating a significant financial opportunity.
The success of Supermicro's business model, which involves converting AI GPUs from companies like Nvidia and AMD into consumer-ready computer servers, offers numerous growth opportunities. For instance, the anticipated ramp-up in production and sales of Nvidia's Blackwell AI chips in 2025, along with AMD's upcoming Instinct MI325X chips, could significantly enhance the company's earnings. These advancements position Supermicro to potentially provide indispensable products for companies aiming to stay competitive in their respective industries.
