With shares trading up around 59% in the last 30 days, Super Micro Computer (SMCI +0.64%) is showing signs of recovery as investors become more confident that it can remain listed on the Nasdaq Composite stock exchange. However, given all the turmoil this tech company has been dealing with over the past several months, investors considering this stock are wondering: Is this the start of a long-term recovery, or just a temporary respite on what appears to be a steep spiral downward?
Let's dig deeper into what the next two years could have in store for this embattled company.
What is Super Micro Computer?
Founded in 1993, Supermicro (as it is generally known) is an information technology hardware specialist that focuses on manufacturing and selling high-performance computer servers. Shares traded on a relatively stable basis for most of the company's time as a public entity. Then a sales catalyst presented itself when the generative artificial intelligence (AI) industry upgraded with the launch of OpenAI's ChatGPT in late 2022.
NASDAQ: SMCI
Key Data Points
Supermicro turns AI chips made by partners like Nvidia and Advanced Micro Devices into ready-to-use computers and servers, giving it a middleman role in this AI industry and allowing it to enjoy a robust growth rate.
Finalized financial data for Supermicro's fiscal 2025 first quarter (which ended Sept. 30, 2024) isn't available because of filing delays while an audit is done. However, an independent special committee appointed by the board of directors released a preliminary report indicating that revenue is within the range of $5.9 billion to $6 billion, representing an eyewatering 180% growth rate compared to the prior-year period. For context, the hardware industry leader Nvidia grew sales "only" 94% in its most recent quarter.
Scorned by the market -- for a reason
Despite its triple-digit growth rate, Supermicro stock currently trades for a forward price-to-earnings (P/E) multiple of just 9.6, compared to the S&P 500 average estimate of 24 and Nvidia's forward P/E of 32. It's hard to pinpoint the exact cause of Supermicro's deeply discounted stock. However, the most likely reason could be a lack of faith in the company's leadership and its accounting team.
Supermicro has dealt with questionable accounting issues before. The stock was delisted from the Nasdaq for a time back in 2018 for failing to file required financial reports. It also received a $17.5 million fine from the Securities and Exchange Commission (SEC) back in 2000 related to improperly recognized revenue.
In March 2024, Hindenburg Research -- known for publishing stock analyses that aid its short-selling operations -- accused Supermicro of accounting manipulation and sanctions evasion. Soon after the Hindenburg report came out, Supermicro delayed filing its required 10-K, and its former auditor, Ernst & Young, resigned, citing an unwillingness to be associated with the company's financial statements.
After this slew of accounting-related incidents, the likelihood grew that Supermicro would fail to find an auditor and end up being delisted from the Nasdaq. Such a scenario would hurt its valuation by making shares less liquid and attractive to mainstream financial institutions. However, the company quickly found another auditor (BDO USA) and submitted a compliance plan to remain listed on the exchange.
Image source: Getty Images.
What could the next two years have in store?
On Dec. 2, Supermicro's share price soared 20% after the independent special committee (appointed by the board) reiterated its claim that it found "no evidence of misconduct" from the company's Board of Directors or management. This is a step in the right direction. However, investors should remember that the company is reportedly still under a Department of Justice (DOJ) probe, so it isn't completely out of the woods yet.
If it hopes to improve the share price over the next two years, Supermicro must resolve these allegations and regain the market's trust. If it does, it will likely improve upon its absurdly low valuation and unlock additional shareholder value. This may also be key to maintaining some vital business relationships, because suppliers like Nvidia may be less willing to do business with a partner that is having legal and regulatory issues.
I am optimistic that Supermicro's stock price will recover from here because I think a lot of the uncertainty is already priced in. However, the stock price is likely to be somewhat volatile for a while. New investors may want to wait for an update from the DOJ, along with possible leadership changes, before opening any position in this stock.
