Super microcomputer(NASDAQ: SMCI) started the year as a star in the artificial intelligence (AI) market. The equipment manufacturer has been around for more than thirty years, selling servers and rack-scale solutions, but only really saw its profits soar with the AI ​​boom. In recent quarters, Supermicro has reported triple-digit sales increases and rising demand for its products. The company works closely with Nvidia and other top chipmakers, integrating their innovations into their equipment.
All of this has helped the stock rise 2,000% over the past five years through 2023, even surpassing Nvidia’s performance in the first half of this year, with a 188% gain. Then, at the end of August, problems arose and began to weigh on this top stock. From a brief report claiming there are problems at the company to the recent firing of Supermicro’s accountant, these times have been difficult for Supermicro and its investors. Since the August 27 brief report, the stock is down about 60%.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
More news came this week, with Supermicro publishing a preliminary and unaudited quarterly earnings report and a general update. Here’s what you need to know before making any investment decisions.
Image source: Getty Images.
Let’s first look at the elements that weighed on the shares. It all started with a short report from Hindenburg Research, which alleged problems at the company, such as “glaring accounting red flags.” Because Hindenburg was short the stock at the time of the report, meaning it stood to benefit from price declines, the company had a bias. That makes it impossible to fully rely on Hindenburg as a source.
Meanwhile, Supermicro has postponed the filing of its 10-K annual report. This may not have been a clear reason to sell or avoid the stock, but it still weighed on investors’ minds.
Supermicro addressed both the Hindenburg report and the 10-K delay in a letter to customers, with words of encouragement. Regarding the short report, Supermicro called the statements “false or inaccurate,” and regarding the 10,000 delay, the company said it did not expect significant changes in fourth-quarter or full-year earnings.
But investor concerns grew when an article appeared The Wall Street Journal talked about a possible Justice Department investigation into Supermicro – Supermicro declined to comment – ​​and when Ernst & Young resigned as Supermicro’s auditor.
In resigning, Ernst & Young said it “could no longer rely on the representations of management and the Audit Committee” and that it was “unwilling to be associated with the financial statements prepared by management.”
Now let’s move on to Supermicro’s update. Ernst & Young initially raised concerns about its internal controls in July, and Supermicro’s board formed an independent committee to assess the situation. This special committee concluded its investigation and issued a statement this week during Supermicro’s earnings report stating that “the Audit Committee acted independently and there is no evidence of fraud or misconduct on the part of management or the Board of Directors . The Committee is recommending a series of corrective actions for the Company to strengthen its internal governance and oversight functions[.]”
Meanwhile, Supermicro says it continues to work on its 10-K, but cannot yet predict when the report will be ready. This is a concern as the company faces the risk of delisting Nasdaq if the country does not submit a report or plan to address the situation later this month. Supermicro received a letter of non-compliance from Nasdaq in September.
At the same time, based on unaudited first-quarter earnings, the company says it expects net sales of $5.9 billion to $6 billion, down from previous expectations of $6 billion to $7 billion. This still represents a triple-digit profit year on year – and Supermicro’s work with partners and progress on a new manufacturing center in Malaysia are progressing smoothly.
The company says it expects its direct liquid cooling (DLC) market share to be at least ten times larger this fiscal year than last year, as the AI ​​market adopts the technology that cools data systems and data centers. Supermicro says its Nvidia GB200 NVL72, a Blackwell-powered rack scale solution, is “ready,” and that the company Advanced micro devices‘ MI300 and MI325 platforms and Intel Gaudi 3 solutions are too.
While there have been reports that Nvidia has shifted its orders to other suppliers, Supermicro said on its call with analysts that there have been “no changes to allocations.”
Finally, the Malaysia facility, expected to open later this quarter, will help Supermicro increase volume and reduce costs – which is good news for margins.
Given all this, what should investors do? Supermicro has become a leader in its industry in recent years, and the company may continue to thrive in this fast-growing environment once it navigates these difficult waters. But despite this positive point, it is impossible to paint a clear picture of the future if questions about internal controls and financial reporting exist. Before investing in a company, it is crucial that you have confidence in its management and understand that company’s financial situation.
That means investors can’t invest wisely in Supermicro right now, no matter how promising the market and the company’s technology look. But this doesn’t mean you should completely forget about this AI giant. Instead, it’s best to keep an eye on how this story unfolds and only make investment decisions once all the facts are known.
Consider the following before buying shares in Super Micro Computer:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Super Micro Computer wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $912,352!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. TheStock Advisoris on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 4, 2024
Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends the following options: Short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Super Micro Computer shares have fallen 60% on troubling news. Here’s what you need to know after the company’s latest update. was originally published by The Motley Fool
