(Bloomberg) — One of Wall Street’s biggest investments in artificial intelligence has been hit with bad news, as buyers who were down stayed away as accounting questions hung over the stock.
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Shares of Super Micro Computer Inc. are headed for their worst month in nearly six years after allegations of accounting problems by a short seller and a delayed 10-K filing that left the company saying it needed more time to review its internal controls. A disappointing earnings report earlier in August also roiled the stock.
It’s a sudden turnaround for a major beneficiary of AI infrastructure spending. Super Micro shares were added to the S&P 500 Index in March and have since fallen 64% from a peak that month. The stock has fallen as much as 36% this week, including Friday’s as much as 6.5% drop.
Hindenburg Research said Tuesday it is shorting the company after an investigation uncovered “clear accounting red flags, evidence of undisclosed related-party transactions, sanctions and export control failures, and customer issues.” The company said Wednesday it will delay filing its annual financial disclosures.
A Super Micro spokesman declined to comment on the Hindenburg report. Asked for comment on the delay in the filing, the spokesman said that “additional time is needed to review a number of internal controls” and that the company has not updated its announced financial results for the most recent fiscal year and quarter.
“The 10-K delay only adds to the uncertainty, even if AI servers remain a great business,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services. “I see the stock moving significantly lower from here.”
Other analysts are sour on the stock. Bank of America on Thursday raised its rating to under review, writing that “the delay in the filing and potential review findings add uncertainty and prevent us from assessing the company’s fundamentals.”
That followed CFRA downgrading Super Micro following Hindenburg’s report. “While we believe the evidence presented does not definitively demonstrate significant accounting malpractice or verifiable sanctions evasion, SMCI’s delayed 10-K filing and potential reputational harm raise concerns,” it wrote.
Few are enticed by a valuation that has fallen to levels that might otherwise be attractive. Shares are trading below 12 times estimated earnings, a fraction of a recent peak near 40, and a discount to the 10-year average.
In terms of estimated revenue, Super Micro trades at 0.9 times, making it the third-cheapest stock in the Nasdaq 100 Index by this metric. Conversely, two of the most expensive stocks are also tied to AI: Nvidia Corp. trades at 19 times estimated revenue, and Arm Holdings Plc tops the list at more than 30 times.
Kaufman said the delayed filing exacerbated broader concerns about how long spending on AI infrastructure will continue to grow at high rates. The issue contributed to a 6.4% drop in Nvidia Corp. on Thursday, after the AI-focused chipmaker issued a forecast that fell short of even the most optimistic expectations.
This isn’t the first time Super Micro has faced questions about its accounting. In 2020, the company resolved a U.S. Securities and Exchange Commission investigation into its accounting and disclosures for fiscal years 2014-2017 by correcting its financial statements and paying a fine, while pledging not to commit such violations in the future.
For many, that episode was forgotten as AI took Wall Street by storm. Super Micro, which sells high-performance servers for data centers, has seen an explosion in both sales and investor interest. Revenue growth topped 140% in its most recent quarter, when it also issued a much stronger-than-expected sales forecast. Revenue is expected to triple this quarter, according to data compiled by Bloomberg.
The stock, which has surged nearly 250% in 2023, still has some defenders. Rosenblatt Securities wrote that “a $10,000 slowdown doesn’t look good, obviously,” but that “the business remains strong and healthy and there has been no change in the company’s financial results.” The sell-off, analyst Hans Mosesmann added, “seems overdone.”
Of course, investors looking for exposure to AI servers have other options, including Dell Technologies Inc., which reported better-than-expected revenue on Thursday thanks to growth in AI servers. Dell gained 3.4% on Friday.
While there is a chance this could be a buying opportunity for investors, “that is still unknown and there is no reason to take that risk when Dell also looks cheap, is also well positioned in servers and doesn’t have these red flags,” said Adam Sarhan, CEO at 50 Park Investments. “It will take time for Super Micro to regain confidence and while you can jump in now, it would really be swim at your own risk.”
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–With assistance from Jeran Wittenstein.
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