Super Micro Computer (NASDAQ: SMCI) started the year off as a star of the artificial intelligence (AI) market. The equipment maker has been around for more than 30 years, selling servers and rack scale solutions, but it truly saw earnings take off with the AI boom. In recent quarters, Supermicro has reported triple-digit increases in revenue and soaring demand for its products. The company works hand-in-hand with Nvidia and other top chipmakers, incorporating their innovations into its equipment.
All this helped the stock rise 2,000% over the last five years through 2023, and even beat Nvidia’s performance in the first half of this year, gaining 188%. Then, in late August, troubles emerged that began to weigh on this top stock. From a short report alleging problems at the company to the recent resignation of Supermicro’s auditor, these times have been difficult for Supermicro and its investors. Since the Aug. 27 short report, the stock has dropped about 60%.
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More news arrived this week, with Supermicro releasing a preliminary and unaudited quarterly earnings report and a general update. Here’s what you need to know before making any investment decisions.
First, let’s consider the elements that have been weighing on the stock. It all began with a short report from Hindenburg Research, alleging troubles at the company such as “glaring accounting red flags.” Since Hindenburg had a short position in the stock at the time of the report, meaning it would benefit from declines in the stock, it held a bias. That makes it impossible to fully rely on Hindenburg as a source.
Meanwhile, Supermicro delayed the filing of its 10-K annual report. This may not have been a clear reason to sell or avoid the stock, but it still weighed on investors’ minds.
Supermicro addressed both the Hindenburg report and the 10-K delay in a letter to customers, offering encouraging words. Regarding the short report, Supermicro called the statements “false or inaccurate,” and concerning the 10-K delay, the company said it didn’t foresee any significant changes to its fourth-quarter or full-year earnings.
But investors’ concerns deepened when an article by The Wall Street Journal spoke of a potential Department of Justice probe into Supermicro — Supermicro declined to comment — and when Ernst & Young resigned as Supermicro’s auditor.
In its resignation, Ernst & Young said it would “no longer be able to rely on management’s and the Audit Committee’s representations” and it was “unwilling to be associated with the financial statements prepared by management.”
