The saga comes full circle Super microcomputer (NASDAQ: SMCI) continued to see shares plummet following news that the accountant has resigned. The stock has bounced around like a ping-pong ball this year, with some extreme moves both up and down. Now the stock is down 9% this year.
Let’s take a closer look at the recent drama surrounding the stock and see if we can determine if the stock is a buy or if we can just stay away from it.
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The latest fall in Supermicro shares follows the resignation of accountant Ernst and Young, with the accounting firm saying it was “unwilling to be associated with the financial statements prepared by management”. The company said his dismissal stemmed from recent information that came to its attention, although it raised concerns about Supermicro’s governance, transparency and internal controls in July.
For its part, Supermicro said it disagreed with Ernst and Young’s assessment and that it does not expect to have to adjust its financial reports. It is currently looking for a replacement accounting firm to conduct its audit. This fiscal year was the first year that Ernst and Young conducted an audit for the company.
Supermicro’s accounting first came into question in the public sphere in August, when short seller Hindenburg Research accused the company of accounting manipulation, sanctions evasion and management self-dealing with affiliated third parties. The accusations were intended to sink the stock price in his favor, and they succeeded. Short selling is when an investor borrows a share from a current shareholder and then immediately sells it with the plan to buy it back later at a lower price.
Supermicro did itself no favors when, shortly after the short report, it decided to delay filing its fiscal 2024 annual report with the Securities and Exchange Commission (SEC) to review the “design and operational effectiveness of its internal controls over financial reporting.” assess. ” The Wall Street Journalmeanwhile, later reported that the company’s accounting was reportedly under investigation by the Department of Justice (DOJ), which also sent Supermicro’s stock plummeting.
In particular, Ernst and Young’s initial concerns emerged before the Hindenburg short report. This isn’t the first time the company has faced potential accounting issues, either. In 2020, the SEC fined Supermicro for prematurely recognizing revenue and understating expenses, noting that employees were encouraged to ship products to warehouses at the end of the quarter, after which they recognized revenue even though the products still had to reach the customers. CEO Charles Liang was fined $2.1 million but was not accused of any wrongdoing.
Although Supermicro has not been found guilty of anything, many adverse allegations have been piled against the company and it has a recent history of accounting manipulation. So investors should keep in mind that this is quite a big risk.
At the same time, Supermicro is a real company that has benefited from the buildout of artificial intelligence (AI) infrastructure. It designs and assembles servers and rack solutions for customers and has carved out a niche by being one of the first companies to embrace direct liquid cooling (DLC) in its installations. AI-powered servers consume a lot of energy and generate a lot of heat and need to be kept cool, and DLC is proving to be a strong solution.
Supermicro recently announced that it has deployed more than 100,000 graphics processing units (GPUs) with DLC solutions, and the company’s products are generally receiving good reviews. However, this is a low-margin business, and the company saw margins come under pressure in its last quarter, the fourth quarter, when gross margin fell to 11.2% from 17% a year ago. By comparison, chip makers such as Nvidia And Broadcom have delivered gross margins of approximately 75%.
While I don’t think we’ve seen the last shoe drop when it comes to Supermicro, nor do I think it’s a great company, I do think it has really benefited from the AI expansion and will likely continue to do so. . Meanwhile, the shares have become quite cheap given the growth opportunities that preceded them, even if quarterly results were ‘softened’ as a result.
All things considered, risk-averse investors should stay away from the stock, which is what I personally would do. However, more risk-tolerant investors might consider taking a small position in the stock based on its AI capabilities and valuation.
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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 stocks plummet again. Time to Buy the Dip or Stay Away? was originally published by The Motley Fool
