Is Super Micro Computer Stock a Buy? 3 Things to Watch.

by skolnes


With shares down by 78% from an all-time high reached in March, Super Micro Computer (NASDAQ: SMCI) might be one of the first dominoes to fall as the artificial intelligence (AI) hype cycle reaches a possible conclusion. But so far, this crash has little to do with company fundamentals and seems more related to allegedly shady accounting practices and possible wrongdoing.

Let’s explore three factors to watch before considering a position in this embattled tech stock.

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The first recent sign of trouble for Supermicro came in late August when short-seller Hindenburg Research — which would financially benefit from a fall in the stock’s price — released a report alleging the company engaged in accounting manipulation, self-dealing, and evading sanctions related to Russia’s invasion of Ukraine. Last week, some of these accusations gained strength when when Supermicro’s auditor, Ernst & Young, resigned, saying, according to Supermicro that “we are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management’s and the Audit Committee’s representations and to be unwilling to be associated with the financial statements prepared by management…”

To make matters worse, Supermicro is also reportedly being looked at by the Justice Department, which is said to be reaching out to the company’s former employees and others.

These developments won’t necessarily affect Supermicro’s operations. However, they could tank its valuation by creating skepticism about the accuracy of its reporting and potential fines that could come up if management is found guilty of wrongdoing. Unfortunately, that might be the best-case scenario for this increasingly embattled company.

Supermicro’s situation could get much worse. Public companies are required to have auditors and to file their financial statements by certain deadlines. The company has fallen out of compliance with both requirements, putting it at risk of delisting by te Nasdaq.

After failing to file its annual 10-K annual report in August, management has until mid-November to submit a compliance plan, which (if approved) could push the deadline to February 2025. However, Supermicro is still in a catch-22 because it doesn’t have an auditor, and the ongoing issues could make new firms hesitant to take on the role.

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