Super Micro Computer (SMCI 0.03%), also known as Supermicro, was one of the market's hottest AI stocks. The shares of the maker of high-end servers set a record high of $118.81 on March 13, representing a 5,080% gain over the previous four years.
At the time, Supermicro seemed to have a bright future. Its revenue jumped 46% in 2022 and 37% in 2023, and analysts were anticipating 110% growth in 2024. That breakneck pace was driven by its soaring shipments of dedicated AI servers.
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But as of this writing, Supermicro's stock trades at about $23. It looks dirt cheap at 7 times forward earnings and less than a multiple of 1 based on next year's sales. But we should understand why its stock was crushed -- and why it shouldn't be considered a turnaround play until it solves its most pressing issues.
Why did Supermicro's stock plunge nearly 80%?
In 2018, Supermicro was delisted from Nasdaq after the Securities and Exchange Commission (SEC) probed the company for "improperly and prematurely" booking revenue. It was only relisted on Nasdaq in 2020 after it reached a settlement with the SEC.
NASDAQ: SMCI
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During the following years, many investors thought Supermicro had resolved those problems. But this August, the prolific short-seller Hindenburg Research released a lengthy report saying that the company had inflated its revenue again with partial orders.
Management denied those allegations, but it subsequently delayed its annual 10-K filing for fiscal 2024 (which ended June 30) because it said it needed more time to assess its "internal controls over financial reporting." At the end of October, its auditor Ernst & Young resigned, saying it was "unwilling to be associated" with management's financial statements.
If Supermicro doesn't turn in its 10-K by Nov. 16, it could be delisted again and booted to the over-the-counter (OTC) markets. That would cause its $1.725 billion in March 2029 convertible notes to become an immediate liability -- since its bondholders have the option to be paid back early if its stock is delisted.
Supermicro still had $2.1 billion in cash and equivalents at the end of September, but an immediate repayment would drain its coffers and make it tough to buy more high-end GPUs for its AI servers.
To hedge against that potential crisis, its top supplier Nvidia (NVDA +0.64%) is reportedly diverting some of the GPU orders earmarked for Supermicro to its competitors. Many of Supermicro's customers could also shift their AI server orders to Dell (DELL +2.48%), Hewlett Packard Enterprise (HPE +1.56%), or other leading AI server makers to avoid its potential meltdown.
To make matters worse, the Department of Justice has reportedly launched a new investigation into Supermicro. Those regulatory headwinds could make it even harder for the company to quickly resolve its accounting issues and delisting threats.
Supermicro is uninvestable until these things happen
Without an audited 10-K filing, we don't know if the company's past financial statements are reliable. Ernst & Young's departure raises a bright red flag, since it's one of the "big four" accounting firms, which also include Deloitte, PwC, and KPMG. If Ernst & Young said it was unwilling to sign off on SuperMicro's financial statements, it's unlikely any of the other big accounting firms will rush to fill that void.
If the company is delisted again over this debacle, many of its remaining investors will probably dump the stock, and its liquidity will dry up in the OTC markets. It will also likely struggle to pay off its debt, purchase new GPUs, retain its customers, and fend off its competitors.
Unless it resolves those problems, we can't put too much faith in analysts' rosy long-term expectations for the company. We also can't consider its stock to be a bargain until we can clearly gauge the damage caused by these existential challenges.
So while it might look like an undervalued hyper-growth stock, it deserves its discount valuation until it secures a new auditor, turns in its 10-K filing, stays listed on the Nasdaq, and allays investors' concerns about a potential Justice Department investigation. Unless it checks all of those boxes, I'd stay far away from Super Micro Computer's beaten-down stock.
