Shares of Super microcomputer (NASDAQ: SMCI) fell again after the company gave investors an update on its fiscal first quarter results and on the current audit and filing process. Supermicro was a big winner early in the year, with shares quadrupling in the first three months of 2024. However, shares are now firmly in negative territory so far after this latest dip.
Let’s take a closer look at Supermicro’s latest positive developments and consider what investors should do with the stock.
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In an update to investors, Supermicro said it now expects first-quarter revenue to be between $5.9 billion and $6.0 billion. Previously, a turnover of between 6 and 7 billion dollars was expected. While it’s clearly a disappointment, it’s worth noting that the company generated $2.1 billion in revenue last year. So even with the lower expectations, sales will still nearly triple year over year.
Supermicro now expects adjusted earnings per share (EPS) to be between $0.75 and $0.76, down from its previous guidance of $0.67 to $0.83. That would be up from $0.34 a year ago, adjusted for the stock’s previous 10-for-1 stock split.
Gross margins, which were a major problem for the company last quarter when they fell to 11.2% from 15.5% in the third quarter and 17% a year ago, were expected to reach 13.3%. This is a sequential improvement that brings it closer to the more historical range of 15% to 17%. However, this is a low-margin business. Chip companies like Nvidia And Broadcom have gross margins closer to 75%.
Looking ahead to its fiscal second quarter, Supermicro expects revenue to be between $5.5 billion and $6.1 billion, with adjusted earnings per share between $0.56 and $0.65. A year ago, the company posted second-quarter revenue of $3.66 billion and adjusted earnings per share of $0.56 (split-adjusted).
On the accounting front, Supermicro said the special committee it formed found no evidence of fraud by management, but it will take a number of corrective measures to help the company strengthen its internal governance and oversight functions. However, the company cannot determine when it will file its 10-K annual report, which was due on August 29.
With the company currently unable to file its annual report, the stock is at risk of being delisted from the stock exchange Nasdaq. The exchange sent Supermicro a letter of non-compliance on September 17 and has 60 days to file or submit a plan to regain compliance. At this point, it appears the stock is in serious danger of being delisted, as the company currently doesn’t even have an accountant after Ernst and Young recently resigned.
Supermicro was delisted earlier in 2019 after it failed to file its annual report on time due to accounting issues, before relisting in 2020. If the shares were to be delisted again, the stock would then trade over the counter (OTC). market. A delisting could also mean that the share is removed from the stock exchange S&P500which it recently joined.
Supermicro is a real company that has benefited immensely from the boom in artificial intelligence (AI) infrastructure. However, there are many questions surrounding the accounting at the moment, with the accountant resigning and the SEC previously finding the company guilty of stuffing the channel.
Apart from the potential accounting problems, the only major risk to the company is that the shadow this casts will cause customers to want to do business elsewhere. While it benefits from the build-out of AI infrastructure, it is in a low-margin, high-competition business.
According to a report from DigiTimes AsiaNvidia has stepped in and diverted orders away from Supermicro given the cloud surrounding the company. If suppliers and customers decide to do less business with Supermicro, it will likely have far more long-term consequences for the company than a government fine.
While investors might consider taking a flyer on the stock given its poor condition, I think it’s best to stay on the sidelines given all the uncertainty and risk surrounding the stock. There are simply better ways to play the AI infrastructure buildout.
Consider the following before buying shares in Super Micro Computer:
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Super Micro Computer shares are falling again after the latest update. Has the bottom been reached, or is there more downside ahead for the stock? was originally published by The Motley Fool
