Stock Plunge of Super Micro Computer: Has the Downward Trend Ended?
Things haven't been looking great for Super Micro Computer (SMCI), losing a substantial 8.26% in value. This downturn came after a critical report accused the company of questionable accounting practices, leading to its auditor's resignation and the failure to file its annual report within the expected deadline. The once-popular AI stock is now displaying numerous warning signs in its operations. Investors are wisely scaling back their investments in response.
As it currently stands, Super Micro Computer stock has plummeted 82% from its highs earlier this year, depriving shareholders of billions of dollars in value. Is this the end of the road for this stock? Or is the company staring at potential accounting fraud?
Auditor departure and delayed securities filings
Super Micro Computer stock reached its peak in March, followed by a few months of slight decreases or steady trade. This seemed like a typical correction following a rapid 250% growth over just a few months. Having been hailed as the beneficiary of the AI spending surge, the company boasted impressive revenue growth as a third-party data center builder, attracting other companies for efficient data center construction using advanced computer chips from companies like Nvidia.
However, some aspects of this rapid revenue growth are now under scrutiny. A damaging short report released on August 27 by renowned short-seller Hindenburg Research alleged discrepancies in accounting, self-dealing with executive family members, and circumventing U.S. foreign sanctions by selling to restricted countries. The report triggered a drop in Super Micro Computer's stock price.
The stock remained relatively stable until the end of October. Then, its auditor, Ernst & Young, withdrew their association with the company's financial statements, expressing uncertainty regarding management's statements. Such a statement coming from a reputable auditor is highly unusual and damning. Previously, the same auditor continued to validate fraudulent financial statements from Wirecard, which featured Russian spies as part of its operations. Now, Super Micro Computer has missed its quarterly Securities and Exchange Commission (SEC) filings, further driving its stock down.
Violations of NASDAQ rules, sluggish revenue growth
Following missing its SEC filings, Super Micro Computer faces the risk of being delisted from the NASDAQ exchange. The company has up to 180 days to submit its annual report past the due date and present a plan to the NASDAQ regulators. If it fails, its stock will be removed from the exchange.
Disregarding these accounting and filing issues, Super Micro Computer's business appears to be slowing down. The company is now predicting $5.9 billion in revenue for the quarter ending in September, lower than the initial projected range of $6 billion to $7 billion. Furthermore, concerns regarding gross margin have surfaced. Over the last 12 months, the company has managed a 14% gross margin, while in 2023 it achieved an 18% gross margin. The declining gross margin will negatively impact Super Micro Computer's ability to generate significant cash flow for shareholders.
Should you buy at a discount?
Considering the numbers provided, Super Micro Computer stock may look like an attractive investment with a trailing P/E ratio of 9, giving it an edge as a fast-growing company benefiting from the AI boom.
However, significant doubts remain regarding the accuracy of the financial statements. Short-sellers are casting doubt on Super Micro Computer's claims, its auditor has withdrawn their endorsement, and the company has yet to submit its financial statements in a timely manner. Developments unfolding within a few short months raise suspicions.
The stock's growth of more than 700% in the last five years and a single-digit P/E ratio may not matter in the current scenario. Regardless of how cheap a stock appears, investors cannot invest in a company with doubt regarding the accuracy of its financial statements. Consequently, it is advisable to refrain from buying Super Micro Computer stock, as there's a high risk it will continue to decline.
Given the current circumstances, investors might want to reconsider their finance strategies when it comes to Super Micro Computer stock. The company's inability to submit its financial statements in a timely manner and the departure of its auditor, Ernst & Young, casts uncertainty over its financial health. This situation makes it difficult for potential investors to make an informed decision about investing their money.
As the company faces potential delisting from the NASDAQ exchange due to missing its SEC filings, investors might choose to hold off on investments until these issues are resolved. The conflicting reports by short-sellers and the company itself add to the uncertainty, making it a risky proposition for those interested in investing in this sector.
