Super microcomputer (NASDAQ: SMCI) the year started with a bang. The stock rose 188% in the first half, even surpassing the performance of the market darling Nvidiaand was invited to join both S&P500 and the Nasdaq-100. And with good reason. Profits at the equipment maker have soared, thanks to customer demand for artificial intelligence (AI).
The company sells workstations, servers and other products essential for AI data centers. And given the predictions for the growth of the AI ​​market – the current $200 billion market is expected to reach a value of $1 trillion by the end of the decade – the future looks bright too. But a few recent news stories have weighed on the company, and its shares are down nearly 30% since late August.
From a short report about problems at the company to an article in The Wall Street Journal Supermicro has recently faced headwinds regarding a possible investigation by the Ministry of Justice. So if you are a shareholder or potential shareholder, you may be wondering what to do. Before you buy or sell, here’s what you need to know.
The Hindenburg Report
Hindenburg Research’s short report was published on August 27. After a three-month investigation, Hindenburg alleges “accounting red flags,” “evidence of… failed export controls” and other problems at Supermicro.
It’s important to note that Hindenburg is short Supermicro stock, meaning it stands to benefit from any price drops. In short selling, an investor borrows shares of a particular company, sells them and then ideally buys them back at a lower price to return to the original owner. Because of this position, Hindenburg has a stock decline bias, making it difficult to rely on the company as an information source.
Supermicro responded to the report, calling the statements “false or inaccurate” and saying it would address them “in due course.”
In unrelated news, but around the same time as the Hindenburg report, Supermicro informed the market that it was delaying the filing of its 10-K annual report – a move that left some investors concerned about possible changes to its earnings figures. But Supermicro continued by saying it did not expect any significant adjustments to its fourth-quarter or full-year figures.
A new element of uncertainty
The comments on both issues should ease investors’ minds. But a third news story, last week, introduced another element of uncertainty. The Wall Street Journalciting people familiar with the matter, reported that the Justice Department had launched an investigation into Supermicro following the Hindenburg report.
The investigation is still in the early stages, the WJ A prosecutor at the U.S. Attorney’s Office in San Francisco recently reported contacting people who may have “relevant information.” Supermicro and the U.S. attorney’s office declined to comment Magazine said.
Following this newspaper report, Supermicro shares fell 12% in one trading session.
So now you might be wondering if this top AI equipment maker is really in trouble – and whether you should stay away from the stock or sell. Or you might be wondering, given the recent share price drop, if this is an opportunity to get in on a recovery story at a good price.
Look at the long term
First, it’s important to remember that a Justice Department investigation has not yet been confirmed – and even if it is confirmed, it doesn’t mean Supermicro did anything wrong. And if we imagine a more difficult scenario, where a probe takes place and potential problems are found, it doesn’t necessarily spell disaster in the long run. So it is essential to follow the story and take a long-term view when considering any developments – positive or negative.
And if you are a shareholder, avoid panic selling. Think about the facts and reconsider how they could impact the business over the next five to ten years. Right now, as far as we know, the future looks bright for Supermicro. The company has a solid track record of earnings growth, its products are in high demand, and the growth of the AI ​​market suggests that Supermicro’s earnings growth could continue for quite some time.
If you are not yet a shareholder, should you buy the shares or wait? Very aggressive investors might find this a good time to buy some shares of Supermicro, as it trades for around 11x forward earnings estimates, which is very cheap for a growth stock.
Still, most investors would be better off staying on the sidelines – temporarily – until we know more about the current problems. After all, Supermicro has said it would elaborate further on the statements in the Hindenburg report, and those words could put investors’ minds at ease.
All of this means that there is indeed reason to be bullish on Supermicro in the long term, but with some uncertainty weighing on the stock, it might be best to wait for some of these clouds to clear before buying.
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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.
Shares of Super Micro Computers are down 30%. Before you buy or sell, here’s what you need to know. was originally published by The Motley Fool
