One of the biggest disappointments of recent times Supermicrocomputer (NASDAQ: SMCI) earnings report came from an unexpected corner. The disappointment didn’t come from the earnings release itself. That showed that the huge growth earned by selling servers with Nvidia‘s artificial intelligence (AI) chips remained.
Instead, it began when short-seller research firm Hindenburg Research published a report alleging accounting irregularities at Super Micro. Shortly thereafter, Super Micro announced it would delay the release of its 10-K for the fourth quarter of fiscal year 2024 (ending June 30).
The stock fell 19% in the trading session following that slowdown. While it has regained some of that lost value, it leaves investors wondering whether to stay invested in the Super Micro growth story or stay away from it.
Understanding the accounting issues
Granted, the gut reaction to dump stocks in these situations makes sense from a certain perspective. Such actions leave investors wondering to what extent Super Micro will make any revisions. At this point, no one knows whether any revisions will be relatively meaningless, or whether they will radically change Super Micro’s investment thesis.
This is indeed a tough one for me on a personal level. Given its growth rate and potential for more growth, it became one of my favorite AI stocks. That’s why I bought shares when it became available at a more reasonable valuation.
Yet, just days after purchasing Super Micro shares, I feel compelled to question my own investment decision and advise risk-averse investors to skip Super Micro.
Moreover, the incident serves as a reminder of a key reason why investment experts encourage diversification. When shareholders invest in an individual stock, they run the risk that the company has reported inaccurate numbers.
This doesn’t mean investors should assume that Super Micro is the next Enron, or even that the delayed filing will reveal any inaccuracies. However, diversification does limit the damage investors can experience from a potential accounting irregularity at one company, making it a hedge that all investors should consider.
The case for staying with Super Micro
When such protective measures are put in place, investors may also choose to buy Super Micro now, assuming they can bear the risk.
The most obvious advantage is the lower share price. At the time of writing, around $385 per share, it sells for a 68% discount from the peak of $1,229 per share it reached five months ago.
It also sells at a price-to-earnings (P/E) ratio of 19. Assuming the fourth fiscal quarter numbers are accurate when Super Micro eventually reports its 10-K, the 82% increase in net income from year-ago levels means this is a low multiple considering the huge growth numbers.
What’s more, despite questions surrounding its upcoming 10-K report, Super Micro’s rapid growth is likely genuine. After all, partner Nvidia continues to report triple-digit revenue growth, largely due to the popularity of its AI chips, which are often used in Super Micro’s servers.
That growth is likely to continue. Allied Market Research predicts a 38% compound annual growth rate for the AI chip industry through 2032. In the fourth fiscal quarter, Super Micro reported revenue growth of 143%, well above industry expectations. Given Super Micro’s critical supporting role in the AI domain, the company should continue to outpace that growth in the coming years.
Should I still invest in Super Micro stock?
At current levels, it looks like you can buy Super Micro shares if you can bear the risk.
Granted, the uncertainty surrounding Super Micro’s filings should keep risk-averse investors out of the stock. More risk-tolerant investors should also avoid big Super Micro bets until it releases its delayed 10-K.
However, Super Micro stock is selling at a very low valuation, and the industry growth trends that are driving the stock are indisputable. Assuming the company can overcome this uncertainty, the stock price could rise significantly higher than current levels.
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Will Healy has positions in Super Micro Computer. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Does Super Micro Computer’s Delayed Filing Change Investment Thesis? was originally published by The Motley Fool
