Super microcomputer (NASDAQ: SMCI) continued its rollercoaster ride this year, recently seeing a rise in its shares after an independent special committee declared there was no misconduct in the company’s accounting. The stock started the year strong, quadrupling within the first three months, but after accounting questions surfaced, the stock gave back all its gains and more and found itself in negative territory in November.
This latest news sparked a major stock rally, which at the time of writing is now up about 45% on the year. However, stock prices move very quickly, so things may be different by the time you read this.
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Let’s take a closer look at the wild ride that Supermicro stock has been on and this latest news to see if it’s time to buy the stock or perhaps take some profits.
Supermicro stock’s early gains were driven by the strong growth the company saw as it built out its artificial intelligence (AI) infrastructure. The company designs and assembles servers and rack solutions for customers, and found a niche by being one of the first companies to offer direct liquid cooling (DLC) for servers. Graphics processing units (GPUs), such as those made by Nvidiacan get very hot and needs some method of being cooled.
Before accounting questions mounted, the company was dealing with gross margin issues, which hurt shares after its second-quarter results. Supermicro’s business has a fairly narrow margin to begin with and there is a lot of competition. Margins are coming under even more pressure as it decided to cut prices to generate revenue, without offsetting the costs of ramping up its DLC business.
As the stock felt the effects of the margin pressure, short seller Hindenburg Research swooped in, claiming Supermicro had manipulated its accounting and committed other crimes. The stock took a hit in the report, which was exacerbated when the company decided to delay the filing of its annual report for the 2024 financial year. The company had already been found guilty of accounting manipulation and fined by the Securities Exchange Commission (SEC) in 2020, so the delay wasn’t exactly a good thing.
The share came under further pressure in the autumn after a report from The Wall Street Journal said the Department of Justice (DOJ) was also investigating the company. Neither the DOJ nor the company have confirmed whether this is true.
The stock enjoyed a brief rebound after the company said it was shipping more than 100,000 GPUs per quarter, but the resignation of its accountant, Ernst & Young, a few weeks later sent the stock plummeting again. In a tough statement from the accounting firm, E&Y said it was “unwilling to be associated with the financial statements prepared by management” after recent information came to its attention, while noting it had previously raised concerns about the board in July and Supermicro’s transparency. and internal controls.
The stock then continued to fall after the company provided a revised first-quarter budget outlook, forecasting revenue of $5.9 billion to $6 billion, well below the previous forecast of $6 billion to $7 billion. Meanwhile, the company said it expects gross margins to come in at about 13.3%, which was a sequential improvement from the 11.2% it saw in the fourth quarter.
However, the stock received a boost after it appointed respected accounting firm BDO as its new auditor, and that rally continued following the latest news that a special committee had found “no evidence of wrongdoing.” The special committee included members of Supermicro’s board, a forensic accounting team from Secretariat Advisors and legal counsel Cooley LLP.
However, the special committee did recommend replacing Chief Financial Officer David Weigand and said the company should add several other senior positions, including a Chief Accounting Officer, Chief Compliance Officers and General Counsel.
Despite the special committee’s findings, the story of Supermicro and the questions surrounding its accounting is likely not over yet. E&Y’s dismissal was very harsh and not typical of what you would hear from a large accounting firm, as they tend to be conservative in nature. BDO still has to certify Supermicro’s annual report and could conduct its own assessment. The resignation of the company’s CFO is also notable; The company’s CFO was ousted when it emerged that the company had committed accounting fraud a few years ago.
That said, Supermicro is still a real business, and while it’s a low-margin company without a wide moat, it’s still benefiting from building out its AI infrastructure. The question is, will all the accounting drama hurt business with customers and suppliers?
With its latest price move, Supermicro now trades at a price-to-earnings (P/E) ratio of just under 11. That’s generally higher than where it was trading before this year due to its low-margin, low-moat business model.
In November, I wrote that I thought investors could take a small position in Supermicro stock given its AI capabilities. With the share price having risen dramatically in a short period of time and questions still remaining, I would probably sit back on the sidelines after this most recent rise.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
SuperMicro shares rise after special committee review. Is it all clear to buy the shares? was originally published by The Motley Fool
