What’s New With Super Micro Stock?

Super Micro Computer stock (NASDAQ: SMCI) has declined by about 49% over the past month and remains down by over 80% from highs seen earlier this year. Now the data center solutions company, which sells server systems, server management software, and installation and maintenance services, 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. For perspective, over FY’24, revenues more than doubled and recent growth has also been strong.  However, the big sell-off SMCI stock has witnessed over the last few months comes amid considerable corporate governance concerns and questions about the company’s financial reporting. So what’s the outlook like for SMCI stock? As an aside, should you Buy, Sell, Or Hold Qualcomm Stock?

SMCI stock has generated better returns than the broader market in each of the last 3 years Returns for the stock were 39% in 2021, 87% in 2022, and 246% in 2023. In contrast, the Trefis High Quality (HQ) 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?

Hindenburg Research published a report noting that there were several red flags in SMCI’s accounting.  The short-seller also claimed that Super Micro may have engaged in improper revenue recognition, allegedly booking incomplete sales, and bypassing internal controls. Additionally, the company is accused of questionable relationships with related parties, particularly suppliers linked to the CEO’s family. Hindenburg also highlights the rehiring of executives previously involved in past scandals, shortly after the company settled with the SEC. While it can be argued that the concerns raised by Hindenburg Research could be somewhat biased, given that Hindenburg held a short position in SMCI stock., there have been red flags raised by  other parties as well. For instance, The Wall Street Journal reported in late September that the company was potentially being probed by the U.S. Justice Department, with the probe reportedly in the early stages. Moreover, Ernst & Young resigned as the company’s public accounting firm in October. The firm appears to have issues with the financial statements prepared by SMCI, as well as the board’s independence from CEO Charles Liang and other members of the management team.

Now following the sell-off, Super Micro stock trades at just about 7.5x forward earnings which is a relatively low multiple, considering the company’s high growth rates. Consensus estimates for FY’25 point to a revenue increase of over 80% for this fiscal year.  Although the server market is quite commoditized, Super Micro has some competitive advantages, given that its products are seen as being more customizable and more energy efficient than rivals. The company also has a longstanding partnership with AI chip titan Nvidia.  This could give SMCI an edge as Nvidia’s latest chips and products can likely be more quickly coupled with SMCI’s server products versus peers.

Super Micro’s customers are also increasingly opting for more premium products. For example, the company estimates that costly liquid-cooling systems for servers, which were relatively rare in the pre-AI era, will be installed in 30% of server racks it ships next year. The company is also steadily boosting its production capacity. For example, it is building out a new facility in Malaysia that can produce over 5,000 racks of server kits every month. This gives the company to ability to scale up revenues in the long run.

However, despite the strong recent financial performance and the surging demand from the generative AI market, it’s difficult to gauge how SMCI stock will fare. Potential issues with the company’s internal controls and accounting can impact the company’s long-term stability and its ability to deliver shareholder value in the long haul. If there are indeed inaccuracies in the company’s financial statements, shareholders may be making decisions based on incorrect information as the company’s true financial health may be obscured. Given these risks, it’s wise to be cautious and wait and watch how the story plays out before committing capital to SMCI stock.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 11/11/2024
[2] Cumulative total returns since the end of 2016

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