Earlier this year, Super microcomputer (NASDAQ: SMCI) co-ruled Nvidia as the best performing stocks on the market. Supermicro advanced 188% in the first half, while Nvidia rose 149%.
Why did this 30-year-old company suddenly jump into the spotlight? The equipment maker, which provided servers for artificial intelligence (AI) data centers, among other things, saw its revenues rise amid the AI boom.
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But this growth story has weakened recently as problems for the company started to pile up, all leading to a more than 60% drop in share prices since late August. A brief report alleged problems at Supermicro, a newspaper article mentioned a possible Justice Department investigation, and recently Supermicro auditor Ernst & Young resigned.
At the same time, Supermicro has fallen behind on its financial reporting, and several weeks ago the company said its 10-K annual report would be late. And just this week, the company said it would not be able to file its report for the quarter ending September 30 on time. Have Supermicro’s problems only gotten worse?
First, some details on the various headwinds, starting with the short report released in late August. In the document, Hindenburg Research alleged a variety of issues, including “glaring accounting red flags.” It’s important to keep in mind that Hindenburg was short Supermicro at the time of the report, so it would benefit if the stock fell. This bias makes it difficult for investors to rely on Hindenburg as a source of information about the equipment manufacturer.
The Wall Street Journal an investigation into Supermicro launched by the Justice Department was later reported. Both the US attorney’s office and the company declined to comment.
Finally, after questioning the company’s internal controls in July, accountant Ernst & Young recently resigned, saying he is “unwilling to be associated with the financial statements prepared by management.” Supermicro’s board has appointed an independent special committee to assess the situation, and the committee recently said: “There is no evidence of fraud or misconduct on the part of management or the Board of Directors.” Although the committee has not yet officially concluded its investigation, these words represent good news for Supermicro and its shareholders.
Meanwhile, Supermicro informed the Securities and Exchange Commission (SEC) that it would be late in filing its 10-K annual report, a move that prompted Nasdaq to send the company a letter of non-compliance. Supermicro now has until November 16 to submit or present a plan to regain compliance. Non-compliance ultimately results in delisting, an outcome that would definitely be bad news.
If Supermicro were delisted, its shares would trade over-the-counter (OTC). In the OTC market, volume is lower and transaction costs are higher, which can weigh on demand for the stock. Moreover, a delisting would further erode investor confidence in the company’s management.
Now we come to breaking news: This week, Supermicro said it would also be unable to file its 10-Q quarterly report on time. This isn’t necessarily a surprise, as the company currently does not have an accountant and will need to hire one to review the financial statements in the 10-Q. As Supermicro noted in its statement to the SEC, the 10-Q cannot be filed before the 10-K annual report.
Does this mean that problems for Supermicro have increased? Not necessarily.
As mentioned, it was clear that without an accountant, Supermicro would be at a standstill when it came to financial reporting. So the company’s problems today are the same as when Ernst & Young resigned a few weeks ago.
What could help Supermicro in the short term is finding a new auditor so the company can move forward with its reporting. Without that, it will be very difficult for Supermicro to continue attracting investors. After all, investors want to have a clear picture of a company’s financial situation before investing in shares. And without an accountant and therefore without archiving financial reports, Supermicro may be on its way to one Nasdaq delisting – another situation that will hurt demand for the shares.
While Supermicro has become a leader in the AI equipment market and could have a bright future ahead of it, all of these elements add far too much uncertainty to the story at this point. The best thing you can do as an investor is keep this player on your watchlist – possibly for some time in the future when the situation improves – and follow this story from the safety of the sidelines.
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Adria Cimino has no positions in the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Have Super Micro Computers’ problems only gotten worse? was originally published by The Motley Fool
