Supermicro's Shares Surge as the Company Strives to Evade Delisting. Is it Beneficial to Acquire the Underperforming Share at Present?
Supermicro's Shares Surge as the Company Strives to Evade Delisting. Is it Beneficial to Acquire the Underperforming Share at Present?
This year has been a thrilling ride for Super Micro Computer's (SMCI -6.45%) stock, filled with significant fluctuations in both directions. The company started the year strong, but its share value started to decline after a critical report from Hindenburg Research alleged accounting manipulation. This was followed by the company's delay in submitting its 10-K annual report.
The situation further escalated when The Wall Street Journal reported about an investigation into Supermicro by the Department of Justice (DOJ) over potential accounting issues, though neither the company nor the DOJ confirmed the report.
However, the stock experienced a surge after Supermicro announced it had been selling over 100,000 graphic processing units (GPUs) each quarter. Yet, this momentum faded when its auditor, Ernst and Young, resigned and Supermicro had to find a new auditor to file its annual report, putting the company at risk of being delisted from the Nasdaq Stock Market.
Supermicro's shares suffered another blow when it announced preliminary Q4 results that fell short of expectations. However, the stock picked up again when Supermicro announced it had found a new auditor.
As of now, the stock is modestly down for the year, approximately 7%, despite its tendency for quick, significant moves. Let's examine the company's recent developments to determine if investors should consider purchasing the stock at its current level.
A new auditor joins the scene
Supermicro's shares skyrocketed by over 30% following its announcement of BDO as its new auditor. Ernst and Young had previously resigned, issuing a harsh statement, expressing concerns about Supermicro's governance, transparency, and internal controls, and stating that it would not be associated with the company's financial statements.
BDO, one of the world's five largest accounting firms, is now Supermicro's new auditor, a significant advantage for the company. In a statement, Supermicro mentioned, "This is an essential step to bring our financial statements up to date, a task we are pursuing with both diligence and urgency."
Alongside announcing the new auditor, Supermicro also stated that it had submitted a compliance plan to the Nasdaq in an attempt to secure a filing extension and retain its listing on the exchange. If delisted, Supermicro's shares would trade on the over-the-counter (OTC) market, which could lead to its removal from the S&P 500 index, which it recently joined.
Is it wise to invest in Supermicro stock?
Supermicro has flourished due to the artificial intelligence (AI) infrastructure expansion, as it provides design and assembly services for servers and rack systems for clients. The company has established a niche by being an early adopter of direct liquid cooling (DLC) solutions to prevent these systems from overheating.
Despite these advantages, the company operates in a more commoditized market with low gross margins and has faced margin issues. Its most recent revenue figures also fell short of estimates, resulting in a double-digit increase year-over-year despite missing its previous forecast.
Additionally, Supermicro currently trades at a forward price-to-earnings (P/E) ratio of around 9.5 times current fiscal year analyst estimates, which represents a relatively inexpensive valuation for a growing company.
However, Supermicro is currently under intense scrutiny over its financials. The SEC has previously fined the company for accounting issues, and the combination of the short report, potential DOJ investigation, and auditor resignation casts a negative light on the company.
Nonetheless, this is a genuine business with high demand. If Supermicro was merely manipulating its numbers to meet forecasts, the consequences might not be as severe long-term.
Investors can consider taking a small position in Supermicro based on its valuation and its role in the AI infrastructure buildout, but this would be a speculative move for risk-tolerant investors.
After Supermicro announced the appointment of BDO as its new auditor, some investors saw this as a positive signal and began investing in the company's stock. This move was aimed at capitalizing on the potential benefits that a reputable auditor like BDO could bring to Supermicro's financial reporting and regulatory compliance efforts.
Given the company's recent struggles with accounting issues and regulatory concerns, some analysts suggest that investing in Supermicro's stock comes with certain financial risks. Potential investors should carefully weigh the pros and cons, including the company's strong position in the AI infrastructure market against the ongoing scrutiny of its financials.