Expanded Challenges Faced by Super Micro Computer?
To start off, in the initial part of this year, Super Micro Computer (SMCI with a -4.64% decline) shared the market's top performer's title with Nvidia. Supermicro's stock soared by 188% in the first half of the year, while Nvidia experienced a 149% increase.
Why did this 30-year-old company suddenly gain prominence? This tech company, specializing in producing equipment such as servers for artificial intelligence (AI) data centers, saw its sales skyrocket due to the AI boom.
However, in recent times, Supermicro has faced several challenges, leading to a more than 60% drop in its stock value since late August. A report raised concerns about the company, a newspaper article suggested a potential Justice Department investigation, and just recently, Supermicro's auditor, Ernst & Young, resigned from its position.
In addition, Supermicro has fallen behind in its financial reporting, and it announced that its 10-K annual report would be delayed. This week, the company also announced that it would not be able to submit its report for the quarter ending Sept. 30 on time. Has Supermicro's troubles worsened further?
The Hindenburg Report
Let's delve into the various obstacles, starting with the Hindenburg Research report released in late August. The report contended that Supermicro faced various issues, including "obvious accounting discrepancies." It's crucial to remember that at the time, Hindenburg owned a short position in Supermicro, so a decrease in the stock's value would benefit the research firm. This conflict of interest makes it challenging for investors to rely on Hindenburg as a reliable source of information regarding the tech company.
The Wall Street Journal later reported about an investigation into Supermicro initiated by the Justice Department. Both the U.S. attorney's office and Supermicro declined to comment.
Lastly, auditor Ernst & Young, after expressing concerns over Supermicro's internal controls in July, recently resigned, citing its unwillingness to be associated with the financial statements prepared by management. The Supermicro board established an independent special committee to review the situation, and the committee recently stated, "There's no evidence of fraud or misconduct on the part of management or the Board of Directors." Although the committee hasn't officially completed its review, these statements represent some positive news for Supermicro and its shareholders.
Meanwhile, Supermicro notified the Securities and Exchange Commission (SEC) that its 10-K annual report would be delayed, prompting Nasdaq to send the company a non-compliance letter. Supermicro now has until Nov. 16 to either file or create a plan to regain compliance. Failing to comply with the regulations eventually results in delisting, a situation that would negatively impact Supermicro's stock.
What happens if Supermicro is delisted?
If Supermicro were to be delisted, its shares would trade on the over-the-counter (OTC) market. The OTC market witnesses lower volume and higher transaction costs, which could impact demand for the stock. Moreover, a delisting would further undermine investors' confidence in the company's management.
Currently, Supermicro has reported that it will also be unable to submit its 10-Q quarterly report on time. While this isn't entirely unexpected, as the company lacks an auditor at present, it must seek a new auditor to review its financial statements before filing the 10-Q report. As Supermicro stated in its declaration to the SEC, the 10-Q report cannot be filed before the 10-K annual report.
Does this suggest that Supermicro's troubles have intensified further? Not necessarily.
As mentioned earlier, the company's predicament remains the same as it was when Ernst & Young resigned a few weeks ago. The company's financial reporting is at a standstill without an auditor.
What could help Supermicro?
Upon finding a new auditor, Supermicro could potentially regain ground in financial reporting, making it more appealing to investors. Without an auditor, it would be challenging for Supermicro to keep attracting investors, as they prefer a clear understanding of a company's financial position before investing. Without an auditor and therefore financial reports, Supermicro may face a Nasdaq delisting - another situation that would negatively impact demand for the stock.
While Supermicro has emerged as a leader in the AI equipment market and could have a promising future ahead, the current state of uncertainty is causing concern among investors. As an investor, the best course of action is to keep Supermicro on your watch list, potentially with the hope that the situation will improve in the future, and monitor the story from the safety of the sidelines.
In light of its financial challenges, some investors might be reconsidering their strategy for investing in Supermicro, considering the company's stock value decline and delayed financial reports. As the search for a new auditor continues, potential investors may choose to keep a close eye on Supermicro's progress in finance and finance-related matters.
Additionally, with the uncertainty surrounding the company's current state, financially-focused individuals might be considering diversifying their portfolio to mitigate potential risks associated with Supermicro's situation.
