Super Micro’s Compliance Plan: Is The Stock A Buy?

Super Micro Computer stock (NASDAQ: SMCI) surged by close to 40% in after-hours trading on Monday, following an announcement that it had hired a new public auditor and submitted a compliance plan to the Nasdaq stock exchange. The move is likely to help the company avoid a potential delisting, pending Nasdaq’s review of the compliance plan. Super Micro has engaged BDO as its auditor, replacing Ernst & Young, which resigned in October after it raised concerns regarding the company’s financial statements. Super Micro also indicated that it would file its overdue 10-K report for the fiscal year ending June, as well as its most recent quarterly filing for the September quarter, although no specific timeline was provided. If Nasdaq approves the compliance plan, the company’s deadline to regain compliance could potentially be extended to February next year. So, is Super Micro stock finally worth a look now? While the markets have rallied following the Trump reelection, here’s a scenario of how S&P Can Crash More Than 40% if inflation rears its head again.

Now, SMCI stock has generated better returns than the broader market in each of the last 4 years. Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SMCI see a strong jump?

Super Micro Computer sells server systems, server management software, and installation and maintenance services, and has been a big winner in the generative AI space, as demand for its server systems surged in tandem with the likes of GPU major Nvidia. Revenues more than doubled in FY’24, with consensus estimates pointing to an additional 80% increase for the current fiscal year. Although the server market is rather commoditized, Super Micro has some competitive advantages, given that its products are seen as more customizable and energy-efficient than those of rivals.

The company also has a longstanding partnership with AI chip titan Nvidia, which could give it an edge as Nvidia’s latest chips and products can likely be integrated with SMCI’s servers more quickly compared to systems operated by peers. Super Micro is also selling a higher mix of premium products, such as liquid-cooling systems for servers, while also expanding its manufacturing capacity. Super Micro stock trades at just about 10x forward earnings, based on the pre-market price on Tuesday and that’s a very reasonable multiple, given the strong growth the company is seeing. Also, see a possible negative scenario for Nvidia in Can Nvidia Stock Lose 50%?

However, the strong AI growth story and apparently robust demand for Super Micro’s products are being overshadowed by serious corporate governance concerns and questions about its financial reporting. Hindenburg Research flagged multiple red flags in the company’s accounting practices in August, and The Wall Street Journal reported in late September that the U.S. Justice Department may be probing the company, although the investigation was reportedly in its early stages at the time. This isn’t the first time Super Micro has faced such scrutiny. In 2018, the company was delisted from Nasdaq following an SEC investigation into its revenue recognition practices, regaining its listing only after settling with the Commission two years later.

While hiring a new auditor is a step forward, investors should consider why a Big Four auditing firm like Ernst & Young declined to associate with the financial statements prepared by the company. The company’s history of delayed reports and concerns raised by various parties doesn’t exactly inspire trust. Even if the company’s valuation looks reasonable today, issues with internal controls and accounting practices may impact its long-term viability and ability to deliver shareholder value. If financial inaccuracies exist, shareholders could be making decisions based on misleading information. Given these risks, it’s probably best to exercise caution with SMCI stock. Are you a more risk-averse investor? Check out if you should Buy, Sell Or Hold CSCO Stock?

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