With shares down by 70% over the last six months, Super Micro Computer (SMCI 6.42%) is in a tailspin. While revenue and earnings continue to break records, the good news has been overshadowed by uncertainty about the company’s internal controls.
These issues came to a head with the recent resignation of Supermicro’s auditor, Ernst & Young, which cited an unwillingness to be associated with the company’s financial statements. Let’s dig deeper to see what this crisis could mean for shareholders over the next year and beyond.
The short-sellers might be right.
Short-seller organizations can be easy to hate because of their self-serving business model and conflicts of interest. Typically, these outfits will have a position in the companies they criticize, allowing them to profit dramatically from bad press, even if it isn’t true. But in some cases, they draw attention to problems that other investors overlooked
In late August, Hindenburg Research released a scathing report saying that Super Micro Computer engaged in accounting manipulation, self-dealing, and evading sanctions related to the Russian invasion of Ukraine. The claims set off a firestorm. And while management denied them, it also delayed filing its annual report to assess what it calls “internal controls over financial reporting” — a bad sign.
In late September, the U.S. Justice Department opened a probe into Supermicro over possible accounting violations. And this month, the company’s auditor, Ernst & Young, resigned after months of disagreement with management over its governance and internal controls. These developments suggest Hindenburg’s claims about Supermicro’s poor accounting practices may have a grain of truth.
Investors should also pay attention to Hindenburg’s other claims, such as sanctions evasion or self-dealing, which could attract fines from the Securities and Exchange Commission (SEC) or other legal penalties depending on the severity of the probe’s findings.
What will the next year bring?
Where there is smoke, there could be fire. And over the coming years, investors should expect more bad news related to Supermicro’s accounting and internal controls.
Analysts at Mizuho fear that the lack of an auditor (and possible challenges in getting a new one) could lead to a delisting from the Nasdaq exchange. This could dramatically reduce Supermicro’s liquidity by forcing it to trade over the counter, a designation that could make shares harder to access, likely hurting the company’s valuation.
Image source: Getty Images.
However, while investors should take Supermicro’s financial reports with a grain of salt, its core operations remain strong. Its fiscal 2024 fourth-quarter revenue surged 143% year over year to $5.3 billion amid robust demand for its data-center liquid cooling systems and computer servers, which turn artificial intelligence chips created by Nvidia and others into a consumer-ready form.
The company’s bottom line also remains resilient, with net income jumping 82% to $353 million in the period.
Cheap for a reason?
Despite the impressive top- and bottom-line growth, Supermicro trades for a forward price-to-earnings multiple (P/E) of just 10, which is breathtakingly low considering its triple-digit growth. For context, the S&P 500 has a forward estimate of 25, while AI hardware leader Nvidia trades for a forward P/E of 36.
Super Micro Computer faces tremendous uncertainty about the quality of its accounting and other internal controls, so the stock price’s discount seems to more than reflect the potential risk. While it is too early to buy shares, investors shouldn’t be surprised if the company experiences a recovery when more information becomes available.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
