The accelerated adoption of artificial intelligence (AI) has been a boon for a number of players in the field Super microcomputer (NASDAQ: SMCI)commonly called Supermicro, was certainly one of them. The company provides state-of-the-art servers specifically designed to handle the workload associated with AI processing. As a result, demand for Supermicro’s products has skyrocketed, boosting financial results and increasing its stock price.
It appears the company may have flown too close to the sun as a number of issues came to light causing its shares to plummet. Since peaking in mid-March, the stock has lost as much as 84% of its value.
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Supermicro has just announced the completion of a special committee investigation and is preparing to take a number of steps based on its recommendations.
Let’s take a look at the challenges the company faced, the results of the assessment and what it means for investors.
It wasn’t long ago that Supermicro was on top of the world as the demand for servers that could handle the rigors of AI seemed unquenchable. At one point early this year, shares were up as much as 1,350% since the AI boom began in early 2023, but that’s when the trouble started. Here’s a look at the issues Supermicro has faced that have weighed so heavily on its share price and investor confidence:
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Well-known short-seller Hindenburg Research released a scathing report alleging accounting red flags in Supermicro’s financials, a pattern of undisclosed related-party transactions and product shipments that violated U.S. export bans.
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Supermicro announced a delay in filing its annual 10-K with the Securities and Exchange Commission (SEC), saying it needed additional time to review its “internal controls” – suggesting it may have failed to comply the accounting rules and regulations.
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The US Department of Justice (DOJ) appeared to be interested, as reports indicated it was investigating allegations made by a whistleblower. The Wall Street Journal.
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Supermicro was at risk of being delisted, according to a notice it received from the Nasdaq stock exchange.
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Supermicro went from pot to fire when it announced that its accountant, Ernst & Young – one of the ‘Big Four’ accounting firms – had resigned during the preparation of the company’s audit. The auditors cited disagreements with management over internal controls and financial reporting.
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In a filing with the regulator, Supermicro revealed it would not be able to file its latest quarterly report, citing ongoing challenges.
This saga caused some investors to lose confidence, and heavy selling punished the stock price.
In mid-November, Supermicro announced that it had hired a new auditor and filed a compliance plan with Nasdaq “in support of its request for an extension of time to return to compliance with Nasdaq’s continued listing requirements.”
The positive developments have continued this week. In a regulatory filing that was withdrawn Monday, Supermicro announced the completion of a “special committee” investigation and report into the allegations. The committee, consisting of audit committee members, independent legal counsel and a forensic accounting firm, found “no evidence of misconduct on the part of management or the board of directors” and that the “audit committee acted independently.” Perhaps most important for shareholders was the revelation that they expected no adjustment to the previously published financial results.
The special committee also found no evidence of violations of U.S. export laws. It was also concluded that Supermicro’s existing related party communications were sufficient. However, the committee did find that there were certain process errors in the internal controls. In fact, the audit committee and the auditor were not informed of the rehires or plans to rehire certain employees who had previously resigned from Supermicro, although the committee concluded that these rehires were the result of “reasonable business judgment.”
The extensive research concluded with a number of recommendations, all of which Supermicro wants to adopt:
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Hire a new Chief Financial Officer (CFO).
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Appoint a Chief Accounting Officer to create an “additional layer of accounting standards and oversight.”
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Appoint a Chief Compliance Officer, separate from the CFO.
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Appoint a general counsel and expand the legal department.
Investors cheered the report’s results, sending Supermicro shares higher.
This is certainly good news for Supermicro shareholders, but there is still more to do. Management has begun a campaign to hire executives for the above-mentioned positions, tighten internal controls to prevent future “failures,” and put this dark chapter in the company’s history behind it.
As a shareholder in Supermicro, I will watch carefully as the company completes this process before making any decisions about its future. Investors should expect the extreme volatility of recent months to continue. Until Supermicro completes the recommendation steps, I still won’t buy the stock.
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Danny Vena holds positions in Super Micro Computer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Super Micro Computer Just Made a Big Announcement and Stock Prices Are Soaring – Is It Finally Time to Buy? was originally published by The Motley Fool
