Facing Challenges: Can Super Micro Computer Overcome Its Predicament?
What's the situation at Super Micro Computer (SMCI) [-0.98%] now?
The shares of this former prominent AI server company have taken a significant nosedive following a series of controversies surrounding its business.
Here's how the events unfolded:
- Aug. 27: Hindenburg Research published a damning report, accusing the company of accounting fraud, self-dealing, sanctions evasion, and illegal stockpiling. The stock plummeted in response.
- Aug. 28: Supermicro announced it was unable to submit its 10-K report on time, citing a need to assess its internal financial controls. It did not anticipate any changes to its Q4 2024 financial results reported on August 6.
- Sept. 3: Supermicro released a statement to customers and partners, reiterating its lack of expectation for material changes to its Q4 2024 financial results. It labelled the report by Hindenburg Research as false and misleading while reassuring customers that their products were unaffected by recent events.
- Sept. 20: Nasdaq informed Supermicro that it was out of compliance due to the late filing of its 10-K report, giving the company 60 days to rectify the situation or submit a plan for doing so.
- Sept. 26: The Wall Street Journal reported that the Justice Department was investigating Super Micro Computer in response to allegations of accounting violations from a former employee.
- Oct. 30: Supermicro revealed that its auditing firm, Ernst & Young (EY), had resigned. In July, EY had expressed concerns about Supermicro's financial reporting, and warned that the timely filing of the 10-K was uncertain. EY ultimately decided it could not rely on the company's financial statements and declined to be associated with them.
- Nov. 5: Supermicro reported preliminary Q1 2025 results, missing their estimates. The stock suffered further losses as a result.
The current situation at Supermicro
Supermicro released its preliminary Q1 2025 results, which fell short of expectations. It predicted revenue between $5.9 billion and $6.0 billion, lower than its previous estimate of $6.0 billion to $7.0 billion. On the profit side, it anticipates adjusted earnings per share of $0.75 to $0.76, at the midpoint of its previous range of $0.67 to $0.83.
For Q2 2025, the company forecasts a decline in revenue to $5.5 billion to $6.1 billion, with adjusted earnings per share of $0.56 to $0.65.
The Independent Special Committee noted that the Audit Committee acted independently, contradicting EY's concern about possible CEO influence. The Committee recommended strengthening the company's internal governance and oversight to address these issues.
Supermicro has yet to provide a timeline for the submission of its 10-K report, despite Nasdaq compliance rules.
What investors are looking for from the company
Supermicro is currently two financial reporting quarters behind. Its stock has dropped over 50% since the release of the Hindenburg report, and has fallen 80% from its all-time high reached in March.
In the meantime, the company must find a new auditor, with a clear plan to rectify the situation as soon as possible.
Management also needs to file its 10-K report promptly and give investors a realistic timeline for doing so, or at least shed light on the obstacles preventing this from happening. Management has largely remained silent on the matter during its latest earnings call.
Management asserts that no major changes will be required to its Q4 2024 financial results, but the Hindenburg Report, EY's resignation, potential DOJ investigation, and Supermicro's inability to resolve this issue in over two months suggest this may be more than a mere procedural issue. Financial corrections, potentially extending back several quarters or even years, are a possibility.
What should investors do?
Until the company provides more transparency and demonstrates clear action to regain compliance, investors should avoid the stock. For current shareholders, deciding to sell may be challenging given the significant decline in the stock price, but further losses may be on the horizon.
The business could easily spiral if it loses the trust of its customers. Reports are emerging that Nvidia, Super Micro Computer's most important supplier, is redirecting demand for its chips to other server companies, fearing potential repercussions from any DOJ investigation or damage to its own reputation.
Management needs to disclose more information and stop being evasive. If it fails to address the issues by the end of the month, the company faces a real risk of being delisted from Nasdaq, exacerbating its reputation problems with investors.
Super Micro Computer is running out of time, and it needs to act.
Investors are closely watching Supermicro's efforts to find a new auditor and provide a timely 10-K report, as these actions could significantly impact the company's stock price. Due to the company's financial reporting delays and the Hindenburg Report's accusations, many investors are avoiding Supermicro's shares, and significant losses may continue.
In the realm of finance, managing this situation effectively calls for Supermicro's management to invest in strengthening its internal oversight, regain investor trust, and promptly disclose relevant information to alleviate investor concerns.
