Super microcomputer (NASDAQ: SMCI)the maker of AI servers, has taken investors on a wild ride over the past three months.
The company’s troubles began in late August with a short-seller report from Hindenburg Research alleging a wide range of accounting irregularities. That was shortly followed by a delay in filing its 10-K, and in September the Justice Department reportedly opened an investigation into the company. It also received a takedown notice from the Nasdaq fair. Last month, the company’s problems reached a fever pitch when its auditor, Ernst & Young, resigned, and the filing of its first-quarter 10-Q filing was also postponed. The company released preliminary first-quarter results but was unable to release a full report, and the stock price continued to spiral, hitting an intraday low of $17.25 on November 15, before the Nasdaq deadline to remain in compliance. That represented a decline of 69% from before the short-seller attack.
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Since then, however, Supermicro has scored some redemption with investors by hiring a new accountant and sending a compliance plan to the Nasdaq. By November 22, the stock was up 92% from its November 15 low.
Investors clearly see recovery potential in Supermicro stock, but if you’re considering buying it, you need to understand the risks the company still faces. Let’s take a look at a few things you need to know.
Investors cheered on Nov. 18 when Supermicro announced it had hired BDO USA as its new auditor, but that could be a bigger risk than investors think as BDO has faced its own regulatory issues.
For example, the company was fined $2 million last year for failing to properly review revenue calculations during a 2018 audit.
An audit quality report from the Public Company Accounting Oversight Board found significant errors in 54% of the 2020 BDO audits it examined, and in 53% in 2021. BDO has also said it has made investments to improve the quality of its improve audits, where they are previous mistakes.
BDO’s own challenges don’t indicate anything nefarious in Supermicro’s hiring, but it could also leave room for doubt if and when Supermicro files its outstanding reports. It also does not affect Ernst & Young’s decision to step down as auditors, and its comment that they were “unwilling to be associated with the financial statements prepared by management”. The fact that Ernst & Young also said it could not rely on management’s statements remains worrying.
Super Micro Computer is still listed on the Nasdaq and the letter to the Nasdaq bought it more time, but is still not in compliance.
In fact, Nasdaq sent Supermicro another letter on Nov. 20 saying it was not in compliance with Nasdaq listing rules. Supermicro said: “The letter has no immediate effect on the listing or trading” of its shares on the Nasdaq.
In this regard, investors are still waiting for the report of Supermicro’s Independent Special Committee, which was due to issue a report on November 15 on corrective measures to improve internal governance. The delay in that report does not seem reassuring.
Supermicro continues to say it expects to file its 10-K, although it cannot predict the timing of that.
It’s unclear what the problem is with Supermicro’s accounting, but Hindenburg’s report contains a wide range of allegations against the company, including “channel stuffing” to generate improper revenue, identifying incomplete sales and circumventing internal accounting controls . It also described conflicts between related parties and transactions between undisclosed related parties.
The financial disagreements between management and Ernst & Young were likely deep and material, as it is highly unusual for an accountant to resign.
Supermicro may be able to overcome these problems in the long run. After all, the company makes real products and has even been name checked Nvidia on its recent earnings call as one of several partners it is working with.
Right now, Supermicro is in a better position than when it didn’t have an accountant and the Nasdaq deadline was looming, but that’s very different from its good financial reporting reputation. The longer the delay in filings, the worse things look for Supermicro, and the more widespread the accounting problems are likely to be.
Another share price decline seems likely because Supermicro hasn’t yet resolved any of the original issues that caused its shares to plummet. Investors should approach the stock with caution. It is not suitable for a long-term investment until there is more clarity about the accounting malfeasance.
Consider the following before buying shares in Super Micro Computer:
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Jeremy Bowman 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.
Are you thinking about buying Super Micro Computer stock? 3 Things You Should Know was originally published by The Motley Fool
