Should Investing in Super Micro Computer's Shares beConsidered? Key Factors to Monitor.
With a drop by 78% from its peak in March, Super Micro Computer (SMCI 2.56%) might be among the first to crumble as the AI fever potentially cools down. However, this significant decrease isn't primarily tied to the company's performance but rather seems related to controversial accounting practices and alleged misconduct.
Let's examine three key aspects prior to considering an investment in this beleaguered tech company.
1. Troubling signs
The first concerning signal for Supermicro surfaced in late August when short-seller Hindenburg Research, who stands to gain financially from a decrease in the stock price, published a report accusing the company of accounting manipulation, self-dealing, and circumventing sanctions due to Russia's invasion of Ukraine. Last week, some of these allegations gained traction when Supermicro's auditor, Ernst & Young, stepped down, stating that they can no longer rely on management's and the Audit Committee’s representations and are unwilling to associate with the financial statements prepared by management due to newly acquired information.
Matters only worsened as it was reported that the Justice Department is examining Supermicro, reaching out to former employees and others.
Although these developments won't directly impact the company's operations, they could dwindle its valuation by stirring doubt about the accuracy of its financial reports and the possibility of penalties resulting from misconduct, if confirmed. Regrettably, this might present the most optimistic outlook for this increasingly embattled business.
2. The risk of delisting
Supermicro's predicament might escalate further. Companies are required to have auditors and submit their financial statements within certain deadlines. Supermicro has breached both requirements, which puts it at risk of being removed from the Nasdaq.
Postpone to submit its annual 10-K annual report in August, management now has until mid-November to submit a compliance plan, which, if approved, could extend the deadline to February 2025. However, Supermicro is still grappling with a conundrum since it lacks an auditor, with ongoing issues potentially discouraging new firms from assuming this role.
Wedbush analyst Matt Bryson discussed the complex predicament in an interview with Bloomberg, explaining that "I think that they probably end up getting delisted just because of the timelines involved. How do they get their 10-K out in just a few months when they don't have an auditor, and their last auditor resigned?"
If Supermicro is delisted, shares would likely transition to the over-the-counter markets, which may offer less liquidity than traditional exchanges. However, this doesn't have to be permanent as companies can regain compliance and return to the Nasdaq. For instance, the stock was delisted in 2019 due to missing Nasdaq reporting deadlines before rejoining the exchange in 2020.
3. Could shares become irresistible?
Most of Supermicro's significant near-term obstacles could impact its valuation instead of its fundamentals, and on November 5, it released some promising, albeit preliminary, insights. Its "independent special committee" suggested quarterly net sales for the fiscal first quarter (ending September 30) of $5.9 billion to $6 billion, representing a substantial 180% growth compared to the $2.12 billion reported in the previous year period.
Currently sporting a forward price-to-earnings ratio of 7.65, Super Micro Computer's stock may seem like an enticing opportunity, but clearer information is required before considering this speculative play.
Investors should exercise caution when considering financing investments in Super Micro Computer due to its current financial and regulatory challenges. The ongoing accounting allegations and the company's breach of auditor and financial statement submission deadlines have put Supermicro at risk of delisting from the Nasdaq, which could impact its share liquidity.
If Supermicro's shares transition to the over-the-counter market, potential investors should carefully consider the reduced liquidity and additional risks associated with this market before making any investing decisions involving the company's stock.
