Super microcomputer (NASDAQ:SMCI) Shareholders have been through a whirlwind lately. While the stock is up 1,480% over the past two years, it is also down more than 70% from its all-time high of the past eight months. As one of Nvidia‘s largest partners, the server maker, should benefit as demand for artificial intelligence (AI) infrastructure increases, but Supermicro has also been accused of accounting manipulation.
Of the 12 analysts covering the company, the average 12-month price target of $30.50 per share implies 8% downside from the current share price of $33. That means six analysts think the stock will fall more than 8% over the next year. Additionally, 19 analysts covered Supermicro three months ago, meaning seven recently dropped coverage. Wall Street is clearly shunning the company.
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Here are the important details.
Super Micro Computer builds servers, including complete server racks equipped with storage and networking that provide customers with a turnkey data center infrastructure solution. Its in-house manufacturing capabilities and ‘building block’ approach to product development allow it to bring new technologies to market faster than its competitors, often within two to six months.
Earlier this year, Rosenblatt analyst Hans Mosesmann wrote: “Super Micro has developed a model that gets to market very, very quickly. They usually have the broadest product portfolio when a new product comes out.” These advantages have helped Supermicro secure a leading position in AI servers, a market that will grow 30% annually through 2033, according to Statista.
Importantly, Supermicro is also the top supplier of direct liquid cooling (DLC) systems, which could help the company strengthen its position in AI servers. DLC systems reduce data center energy consumption by 40% and take up 80% less space than traditional air-cooled systems. AI servers generate more heat than general-purpose servers, so demand for DLC systems is expected to rise rapidly.
While less than 1% of data centers have historically used liquid cooling, Supermicro estimates that 15% (and perhaps as many as 30%) of new data center installations will use liquid cooling in the next two years. positioned to “capture the bulk of that growth.”
As mentioned, while Supermicro shares are up 1,480% over the past two years, they are also down more than 70% from their all-time high over the past eight months. Below is a month-by-month timeline detailing the events that led to that rapid decline in value.
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August 2024: Short-seller Hindenburg Research published a report accusing Supermicro of accounting violations, including improper revenue recognition, undisclosed related-party transactions and sanctions evasion. Subsequently, Supermicro delayed its Form 10-K filing for fiscal year 2024, but CEO Charles Liang said the Hindenburg report contained “false or inaccurate statements.”
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September 2024: The Wall Street Journal reported that Supermicro was investigated by the Justice Department after a former employee filed a lawsuit accusing the company of accounting violations, some of which were cited in the Hindenburg Report. Supermicro also received a letter of non-compliance from the Nasdaq Exchange, stating that it had 60 days to file its 10-K or submit a plan to restore compliance.
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October 2024: Supermicro’s accountant, Ernst & Young, resigned. “We are resigning due to information that recently came to our attention which has resulted in us no longer being able to rely on the statements of management and the Audit Committee,” the company wrote in its resignation letter. Ernst & Young also said it was “unwilling to be associated with the financial statements prepared by management.”
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November 2024: Supermicro delayed its Form 10-Q for the first quarter of fiscal 2025. But the company hired BDO as its new auditor and filed a compliance plan with Nasdaq before the deadline, saying it would receive timely notice of its filings. Now Nasdaq must approve or reject that plan.
The situation is even more complicated than what I just described, because Supermicro has been accused of similar accounting violations in the past. At the time, the company filed its FY 2017 Form 10-K nearly two years late and was fined $17.5 million by the Securities and Exchange Commission (SEC). Supermicro was also delisted from the Nasdaq Exchange for about 18 months, although its shares still rose 73% during that period.
Supermicro’s shares could rise if the misdeeds outlined by Hindenburg are proven to be inaccurate and nothing comes of the Justice Department’s investigation. But investors should be at least a little skeptical, as the SEC has fined the company for similar violations in the past, and Hindenburg says Supermicro has rehired three senior employees involved in the previous scandal.
In that context, I think potential investors should avoid this stock for now. There are simply too many uncertainties to make an informed decision, which likely explains why seven out of nineteen Wall Street analysts have dropped coverage in the past three months. It could also explain why the remaining twelve analysts have set the stock with an average price target that implies 8% downside.
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Trevor Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Should You Buy Super Micro Computer Stock After a 1,480% Gain in 5 Years? Wall Street has a clear answer for investors. was originally published by The Motley Fool
