The Shares of Super Micro Computer Decrease by 60% Due to Concerning Information. Here's What You Should Understand Following the Company's Recent Announcement.
The Shares of Super Micro Computer Decrease by 60% Due to Concerning Information. Here's What You Should Understand Following the Company's Recent Announcement.
Super Micro Computer (SMCI) kicked off the year shining in the artificial intelligence (AI) sector. Established over 3 decades ago, the company is known for its server and rack scale solutions sales. However, it was the AI boom that significantly boosted its earnings. In the recent quarters, Supermicro reported staggering revenue growth and a surging demand for its products. Collaborating closely with tech giants like Nvidia, it incorporates their advancements into its equipment.
The stock soared up to 2,000% over the past 5 years (up to 2023), even outperforming Nvidia in the initial half of this year, ascending by 188%. However, around late August, issues started affecting this top performer's stock. From a short report criticizing the company to its auditor's resignation, Supermicro and its investors have struggled since the Aug. 27 short report, causing a dip of approximately 60% in the stock price.
This week brought new developments, with Supermicro unveiling its preliminary and unreviewed quarterly earnings report and an overall update. Before making any investment decisions, consider the following points.
The initial spark...
Let's delve into the factors impacting the stock. It all started with a short report from Hindenburg Research, claiming "apparent financial inaccuracies." Given Hindenburg had a short position in the stock at the time of report, this could potentially impact its credibility.
On top of that, Supermicro delayed the submission of its 10-K annual report. Although this might not be a clear reason to sell or refrain from purchasing the stock, it still raised concerns among investors.
Supermicro responded to both the Hindenburg report and 10-K delay in a letter to customers. Regarding the short report, Supermicro denounced the statements as false or inaccurate, and regarding the 10-K delay, the company stated they anticipate no significant modifications to its fourth-quarter or full-year earnings.
However, investor worries intensified with an article from the Wall Street Journal suggesting a potential Department of Justice probe into Supermicro, which the company declined to comment on, and when Ernst & Young stepped down as Supermicro's auditor.
Ernst & Young's departure
In its resignation statement, Ernst & Young stated they could no longer rely on management and the audit committee's representations and were reluctant to associate themselves with the financial statements prepared by management.
Moving on to the update from Supermicro. Ernst & Young expressed concerns over internal controls in July, prompting Supermicro's board to establish an independent committee for investigation. The committee completed its investigation and announced during Supermicro's earnings report this week, stating no evidence of fraud or misconduct on the part of the management or the Board of Directors and recommending remedial actions for the company to strengthen its internal governance functions.
Meanwhile, Supermicro is still working on its 10-K, but cannot yet estimate its submission date. The company faces a potential delisting risk from the Nasdaq if it fails to submit the report or develop a resolution plan by the end of this month, having received a letter of non-compliance from Nasdaq in September.
Supermicro's preliminary financial results
Simultaneously, Supermicro forecasts a net sales range of $5.9 billion to $6 billion for the unaudited first fiscal quarter, down from its initial guidance of $6 billion to $7 billion. Despite the decrease, it still signifies triple-digit growth compared to the previous year. Plus, its partnerships and Malaysian production center progress are thriving.
Supermicro anticipates its Direct Liquid Cooling (DLC) market share to expand by at least tenfold this fiscal year, with its Nvidia GB200 NVL72, Blackwell-powered rack scale solution, now available, and its AMD MI300 and MI325 platforms alongside Intel Gaudi 3 solutions nearing readiness.
Reports of Nvidia moving its orders to other suppliers have surfaced, but Supermicro reassured analysts during their call, asserting no alterations to allocations.
The Malaysian facility, set to open towards the end of this quarter, will enhance volume and lower costs, boosting profit margins.
Investment advice
Considering these factors, what should investors do? With its impressive performance in the AI industry, Supermicro could maintain its dominance once navigating these difficult obstacles. However, given the uncertainty surrounding its internal controls and financial reporting, it's crucial for investors to trust management and thoroughly understand the company's financial situation before considering an investment.
As a result, prudent investors should not invest in Supermicro at present, despite the attractive market and company's technology prospect. However, it's advisable to monitor this developing story and only invest when all information is at hand.
Despite the ongoing issues with financial reporting and the potential delisting risk, Supermicro's forecasted net sales indicate significant growth in the first fiscal quarter and promising advancements in partnerships and technology. However, due to the uncertainty surrounding its internal controls and financial situation, it's recommended for investors to exercise caution and wait for a more clear understanding before considering any investments. In the realm of finance and investing, it's vital to carefully assess the risks involved in such situations.
In light of the recent developments in the company's auditing situation, investors may want to closely follow Supermicro's efforts to address internal control concerns and strengthen its financial governance. As the company works towards submitting its 10-K annual report and resolving its Nasdaq compliance issues, their progress could significantly impact the stock's performance and the appropriate time for potential investments.