Super Micro Computer(NASDAQ: SMCI) continued its rollercoaster ride this year, most recently seeing a surge in its shares after saying an independent special committee found no wrongdoing in the company’s accounting. The stock started the year hot, quadrupling within the first three months, but after questions popped up surrounding its accounting, the stock gave back all its gains and more and found itself in negative territory at points in November.
This latest news spurred a big rally in stock, which is now up about 45% on the year, as of this writing. However, the stock moves very quickly, so by the time you’re reading this, it could be different.
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Let’s take a closer at the wild ride that Supermicro’s stock has been on as well as this latest news to see if it’s time to buy the stock or perhaps take some profits.
Supermicro stock’s early gains were driven by the strong growth the company was seeing from the artificial intelligence (AI) infrastructure buildout. The company designs and assemble servers and rack solutions for customers, and it found a niche by being one of the first companies to offer direct liquid cooling (DLC) for servers. Graphic processing units (GPUs), such as those made by Nvidia, can run very hot and need a method to be cooled.
Before questions surrounding its accounting rose, the company was dealing with gross-margin issues, which hurt its stock after its Q2 results. Supermicro’s business is fairly narrow-margin to begin with, and it has a lot of competition. Margins come under even more pressure as it decided to cut prices to gain business while not compensating for the costs of ramping up its DLC business.
With the stock feeling the effects of margin pressures, short-seller Hindenburg Research swept in, asserting that Supermicro manipulated its accounting and committed other malfeasances. The stock took a hit on the report, which was made worse when the company decided to delay the filing of its fiscal year 2024 annual report. The company had been found guilty of accounting manipulation back in 2020 and was fined by the Securities Exchange Commission (SEC), so the delay was not a good look.
The stock came under more pressure in the fall after a report from The Wall Street Journal said that the Department of Justice (DOJ) was also investigating the company. Neither the DOJ nor the company have confirmed whether this is true.
The stock saw a brief rebound after the company said it was shipping more than 100,000 GPUs per quarter, but the resignation of its auditor, Ernst & Young, a few weeks later sent its shares tumbling again. In a harsh statement from the accounting firm, E&Y said it was “unwilling to be associated with the financial statements prepared by management” after recent information had come to its attention while noting that in July, it had previously raised concerns about Supermicro’s governance, transparency, and internal controls.
The stock then continued to fall after the company provided a revise fiscal Q1 outlook, projecting sales of $5.9 billion to $6 billion, well below its previous forecast of $6 billion to $7 billion. Meanwhile, the company said it expect gross margins to come in at about 13.3%, which was a sequential improvement from the 11.2% it saw in fiscal Q4.
However, the stock got a boost after it named respected accounting firm BDO as its new auditor, and that rally continued on the latest news that a special committee found “no evidence of misconduct.” The special committee consisted of members of Supermicro’s board, a forensic accounting team from Secretariat Advisors, and legal counsel Cooley LLP.
However, the special committee did recommend that Chief Financial Officer David Weigand be replaced and said the company should add several other senior positions, including a chief accounting officer, chief compliance officers, and general counsel.
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Despite the special committee’s findings, the saga of Supermicro and the questions around its accounting are likely not over. The resignation of E&Y was very harsh and not typical of what you would hear from a large accounting firm, as they tend to be conservative in nature. BDO still needs to certify Supermicro’s annual report, and it could undertake its own review. The removal of the company’s CFO is also noteworthy; the company’s CFO was ousted when the company was found to have committed accounting fraud a few years ago.
That said, Supermicro is still a real company, and although it’s a low-margin business without a wide moat, it is still benefiting from the AI infrastructure buildout. The question becomes, though, will all the accounting drama hurt its business with customers and suppliers?
With its latest price move, Supermicro now trades at a forward price-to-earnings (P/E) ratio of just under 11. That’s generally above where it traded before this year due to the low-margin, low-moat business model.
In November, I wrote that I thought investors could take a small position in Supermicro’s stock, given its AI opportunities. With the stock’s big jump in price in a short period of time and questions still remaining, though, I’d probably move back to the sidelines after this most recent move higher.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
