Shares of Super Micro Computer (SMCI) have been at the center of controversy in recent months due to allegations of accounting fraud from a short-selling company, sending the stock plummeting. Although the long-awaited ruling in the case came out in Super Micro’s favor, leading to a rally in the shares, there are still concerns associated with the growth story that prompt me to take a neutral stance for now.
While the stock’s valuations remain attractive even after the recent recovery, this article will outline why caution is still warranted over the short to medium term.
To provide some context for why I had a Hold rating on Super Micro Computer (SMCI) stock, the company had recently come under scrutiny due to a report published by Hindenburg Research, a well-known short-selling firm that also had short positions in shares. SMCI. In the report, Hindenburg accused Super Micro of, among other things, accounting manipulations. The main allegations related to Super Micro selling its products to companies already associated with the company in some way.
This raised questions about the authenticity of Super Micro’s reported sales and revenues, suggesting that demand may not have been organic. As a result, questions arose about the need for a closer examination of the company’s balance sheet. These accusations gained traction, in part due to the fact that Super Micro had faced similar problems in the past. In August 2020, the company settled with the SEC for $17.5 million over widespread accounting violations.
Notably, some senior managers involved in that scandal were later rehired, raising concerns about the company’s internal controls and governance. As a result of the latest allegations, SMCI shareholders have suffered significant losses following the release of the Hindenburg report. Despite strong performance earlier this year (with shares up 75% before the report), Super Micro’s shares plunged more than 60% in a two-week period.
Although skepticism over the fraud allegations had already begun to dissipate, with shares recovering more than 80% between the November 15 lows, the final verdict came on December 2, delivering a positive outcome for Super Micro Computer investors. The special committee that oversaw the investigation found no evidence of misconduct by management or the board of directors.
However, it is important to note that the special committee was part of the Super Micro board, meaning it was not a fully independent body. As a result, no adjustment to the company’s reported financials is required. This news sent SMCI shares soaring, rising more than 31% after the announcement. The committee’s key statement read: “The evidence reviewed by the special committee did not raise any substantial concerns about the integrity of Super Micro’s senior management or audit committee.”
However, it is worth noting that the use of the word ‘substantial’ implies that some findings were made in specific processes, even if these were not considered significant. In response, Super Micro has committed to implementing the investigative committee’s recommendations, including the appointment of a new Chief Financial Officer, Chief Compliance Officer and General Counsel.
Since my neutral view on Super Micro Computer stock was mainly due to the uncertainty surrounding the fraud allegations, and those allegations have now been largely refuted, the path to a more bullish view seems clear in theory. Super Micro Computer is well positioned in a booming niche, driven by the rise of generative AI. The company is a leading provider of high-performance servers, with a strong focus on energy efficiency – a key demand in the growing AI and data center markets.
Furthermore, Super Micro’s growth has been impressive, with revenue increasing 110% year over year and a CAGR of 61% over the past three years. The company has also delivered solid profitability growth, with operating income rising 66.29% year-on-year. What makes the stock even more attractive is its valuation, especially after the recent pullback.
Although SMCI stock has recovered and is currently trading higher than in recent weeks, the stock is still trading at relatively cheap prices, especially when considering the company’s strong growth trajectory. Super Micro Computer currently trades at a price-to-earnings ratio of 14.8x. Considering an expected EPS CAGR of 37.5% over the next three to five years, the stock has a PEG ratio of 0.4x, indicating it may be undervalued – or at least that the risk is reduced.
Despite the positives mentioned earlier, there are still some concerns that need to be taken into account. First, while the stock is arguably undervalued, Super Micro Computer’s preliminary first-quarter results indicate second-quarter revenue guidance of $5.8 billion, which is 15% below consensus. This miss could indicate potential issues with the company’s supply-demand dynamics or an over-allocation of inventory.
The timing is particularly notable as Super Micro prepares to launch Nvidia’s (NVDA) new Blackwell GPUs, which could otherwise have contributed to stronger financial results. If the company has too much inventory, it could be forced to sell at lower prices, which could further squeeze margins.
This risk is further exacerbated by the fact that gross margins have already been on a downward trend since fiscal 2024, falling from 17.5% to 13.3% over the past four quarters.
At TipRanks, the current consensus for SMCI is neutral, with a Hold rating. This is based on two bullish analysts, five neutral analysts and two bearish analysts. Additionally, the average price target is $38.57, indicating a 4.1% downside potential from the last share price.
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Now that the charges have been cleared up, Super Micro’s stock is theoretically ‘free’ to be valued based on its full growth potential and strong fundamentals. However, there may still be significant volatility. The company will face changes in top management and will likely face headwinds from shrinking margins and potential inventory adjustments, especially given soft expectations and a less-than-rosy outlook.
The result is that while the shares are undeniably cheap, I prefer to sit on the sidelines for now and wait for the dust to settle before making a more bullish decision on SMCI’s investment thesis.
