Potentially, Super Micro Computer Could Emerge as the Most Notable Revival Tale in 2025?
Potentially, Super Micro Computer Could Emerge as the Most Notable Revival Tale in 2025?
SMCI (-7.42%) has taken investors on an extreme journey in 2024. It commenced the year around $28 per share, then skyrocketed to almost $120 in March. However, it has since surrendered all these gains and is now trading at its initial price, albeit it dipped to around $21 a few days ago.
This drastic fluctuation may surprise most investors, but there's a clear reason for Supermicro's meteoric rise and fall. With the stock now approximately 75% down from its all-time high, could it be poised for a dramatic resurgence in 2025?
The AI boom propelled Super Micro Computer's business
Supermicro manufactures components for data centers and computing servers and also sells full servers. Its unique selling point is liquid-cooled servers, which are significantly more energy-efficient and require less space compared to conventional servers due to their reduced airflow demand.
This advantage fueled demand for its products throughout 2024 as companies raced to build computing power to meet the colossal AI demand. As a result, revenues skyrocketed during 2024, with several quarters reporting over 100% growth.
That is if we trust the data provided by management. While part of Supermicro's decline can be attributed to its hyperbolic rise, the primary cause was accounting fraud allegations.
Can you rely on management's information?
The saga started when prominent short-seller Hindenburg Research released a short report on Supermicro. Short-sellers profit when stock prices drop, and Hindenburg has had mixed success.
Their short report focused on accounting malpractice, for which Supermicro was fined by the Securities and Exchange Commission in 2020 due to accounting issues in 2018.
The following day, Supermicro announced that it was delaying its end-of-year 10-K form to assess "the design and operating effectiveness of its internal controls over financial reporting." This news coupled with Hindenburg's report resulted in a substantial drop in the stock price over a few days. Then, The Wall Street Journal reported that the Department of Justice was investigating the company, causing the stock to fall further.
At this point, Supermicro's accounting practices were under scrutiny, but it was unclear whether there were actual issues. However, Supermicro's auditor, EY (formerly Ernst & Young), resigned due to its reservations about the information being reported.
Auditors have access to far more information than ordinary investors, and their departure can signal potential issues. This led to a further drop in the stock price and wiped out all its gains for 2024.
Given the stock's substantial decrease, investors might view it as a potential bargain, given its strong tailwinds due to AI. However, there are other considerations.
Even if Supermicro's business continues to thrive, the lack of trust in management is a significant obstacle. This has caused several institutional investors to shun the stock, making it difficult for its price to rise due to the lack of substantial buying pressure.
Trusting a company's statements to investors is crucial to investing, and there's little reason to do so with Supermicro at this time.
A new management team could potentially restore this trust. However, given that CEO Charles Liang is the founder, president, CEO, and chairman of the board, such a change seems unlikely.
But there's a new chapter in Supermicro's story. It has appointed BDO, a reputable firm, as its new auditor and has introduced a plan to file its 10-K and first-quarter 10-Q forms in a timely manner. This announcement caused the stock price to increase by approximately 30%, which could spark a significant upswing if investors start to trust the company. However, just because there's a new auditor doesn't mean Supermicro's financials have been magically resolved. Issues regarding reporting could still persist.
Super Micro Computer might represent a sensational resurgence story in 2025. However, I would advise investors to steer clear, given the numerous uncertainties and potential for further deterioration before improvement takes place. There are numerous other more secure investment options available than assuming substantial risk with Supermicro, and I would opt for those other stocks over Supermicro.
Despite the appointment of a reputable auditor and Supermicro's plans to improve financial reporting, investors may still be wary due to the lack of trust in the company's management. This cautious approach could hinder potential investing opportunities in the finance sector.
As Supermicro tries to recover from its accounting issues and potential lack of transparency, many investors might choose to invest their money in more reliable companies, steering clear of the financial risks associated with Supermicro's situation.