Super Micro Computer's (SMCI 7.53%) shares are up more than 65% over the last month, reversing a dramatic 85% wipeout of the company's market value over an eight-month period. Supermicro's stock price had crashed from an all-time high of $118.81 on March 13 this year, to $17.94 on Nov. 14.
The market was concerned about the company's weaker-than-expected financial results and an unfavorable report from short-seller Hindenburg Research in August 2024, followed by management's announcement to delay filing the annual report. These worries further exacerbated after the U.S. Department of Justice (DOJ) announced an investigation into the company's accounting practices. Finally, investor sentiment worsened when Supermicro's auditor Ernst & Young resigned in October 2024, citing "integrity" concerns.
NASDAQ: SMCI
Key Data Points
However, the recent favorable update from an independent special committee seems to have assuaged some of those concerns. On Nov. 18, the company appointed BDO USA, the fifth-largest accounting firm in the U.S., as its independent auditor. Supermicro is now focusing on filing pending financial reports for fiscal 2024 and the first quarter of fiscal 2025.
Against this backdrop, should investors pick up a small stake in this company. Here's a layout of the factors working in the company's favor. Let's check if they are sufficient enough to warrant an investment.
AI tailwinds
A leading high-performance turnkey server and storage systems player, Supermicro continues to be a major beneficiary of the explosive demand for AI infrastructure across data centers and enterprises. The company uses cutting-edge chips from semiconductor players like Nvidia, Advanced Micro Devices, and Intel to build low-cost, modular, scalable, and energy-efficient server systems. With demand for high-performance computing growing robustly, Street analysts expect Supermicro's financials to be quite healthy in the coming quarters.
In November, Supermicro reported preliminary financial information for the first quarter of fiscal year 2025 (ending Sept. 30). The company expects net sales between $5.9 billion to $6 billion, lower than the previous estimate of $6 billion to $7 billion. This slowdown is attributed to some customers waiting for Nvidia's new Blackwell chip. Supermicro is ready with its Blackwell-based liquid cooling GP200 solution and is now waiting for Blackwell chip deliveries.
Blackwell is expected to be a big growth catalyst for Nvidia. Morgan Stanley's analysts expect the Blackwell launch to garner roughly $10 billion in sales for Nvidia in the fourth quarter (ending Dec. 31). With Supermicro's revenues closely linked to chip demand, the company also stands to benefit dramatically in the next few quarters.
Reduced risk of Nasdaq delisting
For the past several months, the risk of Nasdaq delisting has haunted Supermicro investors. However, things seem to have taken a turn for the better now. In early December, management announced favorable findings from an internal investigation conducted by an independent special committee (supported by legal firm Cooley LLP and forensic accounting firm Secretariat Advisors).
According to the investigation, contrary to Hindenburg's claims, there is no evidence of misconduct or governance issues from management or the board of directors and that of U.S. export law violations. The committee also did not find any significant discrepancies in third-party disclosures. Furthermore, the company does not need to restate its financial restatements for the previous quarters. All this has helped bolster investor confidence.
However, the special committee found certain "lapses" related to guardrails and internal controls. To remedy this situation, the committee has recommended several measures, such as hiring a new chief financial officer (CFO); appointing a chief accounting officer, chief compliance officer, and general counsel; and expanding the legal team. These new hires significantly reduce the company's future operational risks.
Finally, on Dec. 6, Supermicro received an extension from the Nasdaq exchange to submit its pending financial reports until Feb. 25, 2025. This further reduces the probability of a potential Nasdaq delisting.
The stock is still extremely cheap
Supermicro is trading at 1.84 times trailing-12-month sales, lower than its three-year average multiple of 2.06x. The valuation seems quite cheap even for a high-risk company, considering that it's well positioned to ride the ever-expanding AI wave. Despite the 65% rise in value over the last month, the stock is up just 49% over the last 12 months.
It is indisputable that investing in Supermicro is a high-risk, high-reward proposition. The company is already facing stiff competition from Dell Technologies and Hewlett Packard Enterprise. Moreover, despite the special committee's positive findings, BDO USA might still conduct a review and come to unfavorable conclusions.
So considering the tailwinds and headwinds Supermicro is facing, it currently only makes sense for investors with a high degree of risk tolerance to consider picking up a stake. For the rest, it's best to watch and wait.
