Super microcomputer (NASDAQ: SMCI), also known as Supermicro, was one of the hottest AI stocks on the market. Shares of the high-end server maker hit an all-time high of $118.81 on March 13, marking a gain of 5,080% over the previous four years.
At the time, Supermicro seemed to have a bright future. Revenue rose 46% in 2022 and 37% in 2023, and analysts expected 110% growth in 2024. That breakneck pace was driven by rising shipments of dedicated AI servers.
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But as of this writing, Supermicro shares are trading around $23. It looks dirt cheap at seven times forward earnings and less than a multiple of one based on next year’s sales. But we need to understand why the share price was crushed – and why it shouldn’t be considered a turnaround until the most pressing issues are resolved.
In 2018, Supermicro was delisted Nasdaq after the Securities and Exchange Commission (SEC) investigated the company for “improper and premature” revenue booking. It only relisted on the Nasdaq in 2020 after reaching a settlement with the SEC.
In subsequent years, many investors thought Supermicro had solved these problems. But last August, prolific short seller Hindenburg Research released a lengthy report saying the company had once again inflated its revenues with partial orders.
Management denied these allegations, but then postponed its annual 10-K filing for fiscal year 2024 (which ended June 30), saying it needed more time to assess its “internal controls over financial reporting.” . At the end of October, accountant Ernst & Young resigned because he was “unwilling to be associated” with management’s financial statements.
If Supermicro doesn’t file its 10-K by November 16, it could be taken private again and launched on the over-the-counter (OTC) markets. That would result in the $1.725 billion convertible bonds becoming an immediate liability in March 2029 – as bondholders have the option of early repayment if the shares are delisted.
Supermicro still had $2.1 billion in cash and equivalents at the end of September, but an immediate refund would empty its coffers and make it difficult to buy more high-end GPUs for its AI servers.
To hedge against that potential crisis, is its top supplier Nvidia (NASDAQ: NVDA) will reportedly redirect some of the GPU orders destined for Supermicro to its competitors. Many Supermicro customers could also move their AI server orders Dell (NYSE: DELL), Hewlett Packard Enterprise (NYSE: HPE) or other leading AI server manufacturers to prevent a possible meltdown.
To make matters worse, the Justice Department has reportedly launched a new investigation into Supermicro. These regulatory headwinds could make it even more difficult for the company to quickly resolve its accounting issues and take threats private.
Without an audited 10-K filing, we don’t know if the company’s prior financial statements are reliable. Ernst & Young’s departure raises a red flag as it is one of the ‘big four’ accounting firms, which also includes Deloitte, PwC and KPMG. If Ernst & Young said it was unwilling to sign off on SuperMicro’s financial statements, it’s unlikely any of the other major accounting firms will rush to fill that void.
If the company is taken private again due to this debacle, many of the remaining investors will likely dump the shares, and liquidity in the OTC markets will dry up. It will also likely struggle to pay down its debt, purchase new GPUs, retain its customers and fend off its competitors.
Unless these issues are resolved, we can’t put too much faith in analysts’ rosy long-term expectations for the company. Nor can we consider its shares a bargain until we can clearly assess the damage caused by these existential challenges.
So while it may look like an undervalued hyper-growth stock, it deserves its discounted valuation until it finds a new accountant, files its 10-K, remains listed on Nasdaq, and addresses investor concerns about a possible Justice Department investigation takes away. . Unless it checks all these boxes, I’d stay well away from beaten Super Micro Computer stock.
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Leo sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has one disclosure policy.
Be Wary of Super Micro Computer Stock Unless This Happens, originally published by The Motley Fool
