Super Micro Computer Delivers Notable Updates, Propelling Stock Growth. Could the Troubles Have Reached Their End?
The rapid adoption of artificial intelligence (AI) has brought numerous firms into the limelight, with Super Micro Computer (SMCI -3.90%), often referred to as Supermicro, reportedly benefiting the most. With its specialized servers designed to withstand AI's demands, Supermicro holds a crucial place in the AI revolution.
Regrettably, stardom can sometimes be harsh, as Supermicro discovered when it faced a series of self-inflicted wounds, causing a plunge of around 84% in the stock price since its all-time high earlier this year.
Supermicro formally announced measures to avoid delisting and subsequently hired a new auditor, which resulted in the stock price increasing by more than 30% on Tuesday (as of when this was written).
Let's examine the events that unfolded, the company's significant announcement, and its implications for investors.
A cascade of adverse news
Supermicro experienced a meteoric rise at the beginning of the year, propelled by the increased demand for AI-centric servers, causing the stock to surge by over 1,000% since the AI movement started in early 2023. However, the upward trend was fleeting, as the stock encountered a dramatic fall. For those unaware of the challenges Supermicro has been grappling with, here is a summary of its recent setbacks:
- Hindenburg Research released a report alleging accounting irregularities, failure to disclose related-party transactions, and U.S. export regulation violations.
- Just a day after this report, Supermicro acknowledged delays in submitting its annual 10-K report to the Securities and Exchange Commission (SEC), stating it needed additional time to review its internal controls.
- Subsequent reports suggested that the U.S. Department of Justice (DOJ) was investigating Supermicro, apparently a consequence of a whistleblower complaint alleging accounting violations.
- Supermicro received a Letter of Non-Compliance from the Nasdaq exchange, potentially leading to delisting.
- It was revealed that Supermicro's auditor, Ernst & Young (one of the world's leading accounting firms), had withdrawn from the audit, citing concerns about the company's internal controls for its financial reporting.
- In another filing, Supermicro admitted that it would not be able to submit its most recent quarterly report on time, further stoking delisting concerns.
Given the scope and gravity of Supermicro's challenges, many shareholders were compelled to sell their stakes.
A glimmer of optimism
The saying goes that "darkness is deepest before dawn." This optimism seemed to materialize this morning for Supermicro and its investors.
The company declared that it had engaged BDO as its new auditor to complete the audit, marking the beginning of the process to restore credibility. However, the audit may take some time to be completed, as the new auditor will need to start from scratch.
Furthermore, Supermicro submitted a Compliance Plan to the Nasdaq exchange, aiming to secure an extension to rectify its compliance with the Nasdaq listing requirements.
These announcements sparked cautious optimism in the investors, leading many to re-enter the stock.
Caution advised...
While these developments are undeniably promising, investors should not get overly enthusiastic, as there are several warning signs that remain. As a Certified Public Accountant (CPA) with experience in reviewing audits, I am still concerned about Supermicro's former auditor resigning during the audit itself.
Scenarios like these generally indicate that the auditor has concerns about the company's accounting practices, high risk owing to weak internal controls, or disagreement over accounting policies between the auditor and management. Moreover, the fact that Supermicro's original auditor resigned quickly following the short report containing allegations of accounting irregularities increases the possibility of foul play.
To be clear, I am hopeful that Supermicro will rectify its accounting issues, enabling it to focus on the potentially groundbreaking AI market. I am a shareholder and believe in the company's promising future as long as it addresses its accounting concerns.
However, until additional details emerge regarding the factors contributing to Supermicro's sudden decline, I will maintain a bearish stance on the stock. I will remain reluctant to invest in it, and I urge caution for other potential investors as well.
Despite the recent turmoil, Supermicro's promising future in the AI market remains intact, providing an opportunity for those who are financially prepared to invest. In light of the company's efforts to restore credibility by hiring a new auditor and submitting a Compliance Plan, investors are now considering pouring money back into the stock. However, it's crucial to exercise caution, considering the concerns over the former auditor's resignation and potential accounting irregularities. With a bearish stance, it might be wise to wait for more details before making a decision, as a deep dive into the company's accounting practices could prove vital for future investments in the finance sphere.
