With shares down 70% in the past six months, Super microcomputer (NASDAQ: SMCI) is in a downward spiral. While sales and profits continue to break records, so does the good news overshadowed due to uncertainty about the company’s internal controls.
These issues came to a head with the recent resignation of Supermicro’s accountant, Ernst & Young, who argued that he was unwilling to be associated with the company’s financial statements. Let’s dig deeper to see what this crisis could mean for shareholders in the coming year and beyond.
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Short seller Organizations can be easy to hate because of their self-interested business model and conflicts of interest. Typically, these groups will take a position in the companies they criticize, allowing them to profit dramatically from bad press, even if it isn’t true. But in some cases they draw attention to problems that other investors have overlooked
In late August, Hindenburg Research released a scathing report alleging that Super Micro Computer engaged in accounting manipulation, self-dealing, and sanctions evasion related to Russia’s invasion of Ukraine. The claims caused a firestorm. And while management denied these, it also delayed the filing of its annual report to review what it calls “internal controls over financial reporting” – a bad sign.
At the end of September, the US Department of Justice opened an investigation into Supermicro for possible accounting violations. And this month, the company’s auditor, Ernst & Young, resigned after months of disagreements with management over governance and internal controls. These developments suggest that Hindenburg’s claims about Supermicro’s poor accounting practices may contain some truth.
Investors should also pay attention to Hindenburg’s other claims, such as sanctions evasion or self-dealing, which could carry Securities and Exchange Commission (SEC) fines or other legal penalties depending on the severity of the investigation’s findings.
Where there is smoke, fire can also occur. And in the coming years, investors can expect more bad news regarding Supermicro’s accounting and internal controls.
Analysts at Mizuho fears that the lack of an accountant (and possible challenges in obtaining a new one) could lead to delisting Nasdaq stock exchange. This could dramatically reduce Supermicro’s liquidity by forcing it into trading over the countera designation that could make access to shares more difficult, likely hurting the company’s valuation.
