Things have gone from bad to worse Super microcomputer(NASDAQ: SMCI). After a scathing short report exposed questionable accounting practices, the company’s accountant resigned and it failed to file its annual report by the expected due date. The once-beloved artificial intelligence (AI) stock is showing red flag after red flag with its business practices. Investors act rationally and exit their positions.
At the time of writing, shares of Super Micro Computer are down 82% from their highs earlier this year, wiping out billions of dollars in shareholder value. Is the worst over for this stock? Or is the company confronted with possible accounting fraud?
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Super Micro Computer stock peaked in March. It traded slightly lower to flat for a few months, which looked like a normal price correction after rising 250% in just a few months. The company was declared the winner of the AI spending boom and posted gangbusters revenue growth as a builder of third-party data centers. Other companies came to Super Micro Computer to build efficient data centers with advanced computer chips from, among others Nvidia.
Now some of this sales growth is being questioned. The allegations began on August 27 when famed short-seller Hindenburg Research released a short report alleging accounting manipulation, self-dealing with relatives of executives and evading US foreign sanctions by selling to restricted countries. Given Hindenburg’s strong track record, Super Micro Computer stock fell on this news.
The stock continued to tread water until the end of October. Subsequently, the auditor, Ernst & Young, resigned, stating that he was unwilling to associate himself with the financial statements prepared by management. A public statement from an accountant like this is rare and damning. You could say that accountants usually are too benevolent with management teams. The same auditor has also validated this Wire card‘s financial statements, which ultimately included Russian spies as part of the fraud. Now, Super Micro Computer has postponed its quarterly filing with the Securities and Exchange Commission (SEC), driving its shares even lower.
With no SEC filings, Super Micro Computer is now at risk of being delisted from the Nasdaq stock exchange. The company has 180 days to file its annual report after the due date once it formulates a plan with Nasdaq regulators. If this is not the case, the share will be delisted from the stock exchange.
If we ignore these accounting and record-keeping problems, Super Micro Computer’s business appears to be stagnating. The company expects to generate about $5.9 billion in revenue for the quarter ending in September, compared with previous expectations of $6 billion to $7 billion. The gross margin is also a concern. Over the past twelve months, the company has generated a gross margin of 14%, compared to 18% in 2023. This declining margin will hurt Super Micro Computer’s ability to generate significant cash flow for shareholders.
Based on the figures mentioned, the Super Micro Computer share looks cheap. It has a price-to-earnings (P/E) ratio of 9, which is dirt cheap for a fast-growing company that should benefit from the AI boom.
However, there is considerable doubt that Super Micro Computer’s financial statements are accurate at all. Short sellers are calling the company’s bluff, the accountant has just resigned, and it appears the company can’t produce its own financial statements on time. All these developments happening in just a few months should raise suspicion.
The stock is up more than 700% in the past five years and has a single-digit price-to-earnings ratio. However, that doesn’t matter. No matter how cheap a stock looks, you can’t invest in a company if you have no idea whether its financial statements are accurate. Avoid buying the dip on Super Micro Computer stock; there is a high risk that the shares will fall further from now on.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Supermicrocomputer stock collapse: Is the worst over? was originally published by The Motley Fool
