Everyone loves a comeback story. And after about doubling recent lows, Super microcomputer (NASDAQ: SMCI) appears to be shaking off fears of delisting, which were reinforced by the surprise resignation of the accountant on October 30.
But the company is not out of the woods yet. Let’s go there the pros and cons of Supermicro to decide if its shares are a good investment.
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Supermicro’s shares began falling sharply after hitting an all-time high of around $116 in March. The decline deepened in late August, when short-selling firm Hindenburg Research released a report accusing the company of accounting manipulation, conflict of interest and sanctions evasion related to Russia’s invasion of Ukraine.
Shortly thereafter, Supermicro postponed the filing of its annual report. And later the accountant, Ernst & Young, resigned because he was unwilling to be associated with the financial statements. Some analysts expected Supermicro to be delisted from the Nasdaq, an outcome that could hurt its stock price by deterring institutional buyers and making the shares less liquid.
Supermicro acted quickly to turn the situation around — creating an independent special committee that released preliminary financial information and carried out an internal review that found “no evidence of fraud or misconduct by management or the Board of Directors.”
The market finally started to show optimism when the company appointed a new accountant — BDO USA, PC — and filed a plan with Nasdaq to remain listed on the exchange. But while the situation looks encouraging, this is no guarantee that Supermicro will continue to trade on the Nasdaq. According to analysts from Mizuho According to CNBC, Nasdaq will have to approve or reject the compliance plan, which could take two to five weeks.
In the meantime, investors should examine Supermicro’s financial results prepared by the independent special committee. While these unaudited numbers should be taken with a grain of salt, they provide important clues about the company’s operational health and valuation.
Although Supermicro’s preliminary fiscal first-quarter results (for the three months ended September 30) fell short of expectations, the results would be considered fantastic for most companies. When the figures are final, nand sales are expected in a range of $5.9 billion to $6 billion. The lower end of that range is slightly off the bottom of management’s expectations of $6 billion to $7 billion, but it’s more than double the year-ago period’s revenue.
Investors should expect Supermicro to maintain a high growth rate due to its exposure to the generative artificial intelligence (AI) industry, which makes chips made by partners like Nvidia And Advanced micro devices in ready-made computer servers for customers.
Investors don’t necessarily have to take Supermicro’s financial reports at face value to get a sense of how quickly this opportunity is expanding, because they can look at the performance of its partners for context. Nvidia’s revenue rose 94% year over year in its most recent quarter. And Supermicro likely played a role as a middleman in many of those sales, helping the company maintain a similar sales growth rate. This gives me confidence in the company.
Immediately forward price-earnings ratio (P/E) multiple of only about 10 as I write this, Supermicro stock is incredibly cheap compared to its triple-digit growth rate. And while management is To issue an officially audited report, we can look at the partners’ performance to get an idea of what it is going on.
That said, Supermicro isn’t out of the woods yet. The new auditors must do their job and file reports with the SEC to comply with Nasdaq listing rules. The company is also reportedly facing a Justice Department investigation into its accounting practices.
Investors should keep all of these factors in mind when considering a position in Supermicro stock. Some numbers are enticing, but there is the risk of the unknown.
Consider the following before buying shares in Super Micro Computer:
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Is Super Micro Computer Stock a Buy? was originally published by The Motley Fool
