Delisting Deadline Looms For Super Micro Stock

Super Micro Computer stock (NASDAQ: SMCI) fell by about 6% in Tuesday’s trading and remains down 54% over the past month amid significant corporate governance concerns and questions about the company’s financial reporting. Hindenburg Research published a report highlighting several red flags in SMCI’s accounting practices. Moreover, the company delayed filing its annual financial statement in August for the last fiscal year, putting Super Micro out of compliance with Nasdaq exchange listing rules, which require timely filings with the U.S. Securities and Exchange Commission (SEC). Now, Super Micro faces a critical deadline on November 16th to either file the delayed report or submit a plan for regaining compliance. If it fails to do so, the company risks being delisted from the Nasdaq. However, there’s a big hurdle here. Super Micro’s auditor Ernst & Young resigned in October, noting that it was unwilling to be associated with the financial statements prepared by the company and that the company will likely need to find a new auditor to be able to file an audited 10-K filing or to effectively convince the SEC that it is on the job.  See our analysis of What’s happening with SMCI 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. However, given the considerable red flags, what should you do with SMCI stock?

Super Micro has faced similar issues in the past. The company was delisted from the Nasdaq in 2018 after an SEC probe into its revenue recognition practices. It was only relisted about two years later after settling with the Commission. Given the current situation, there is a decent possibility of history repeating itself. With nearly $15 billion in revenue last fiscal year, Super Micro is a large company that can potentially only be audited by one of the Big Four accounting firms, namely Ernst & Young, Deloitte, PricewaterhouseCoopers, or KPMG. Smaller firms may not have the bandwidth to audit a company of its size. However, given that Ernst & Young was unwilling to sign off on SMCI’s accounts, it’s unclear if any of the other major firms would be up to taking on the risk.

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 over FY’24 and recent growth has also been strong with consensus estimates pointing to a revenue increase of about 80% for this fiscal year. Now, following the sell-off, Super Micro stock trades at just 6.5x forward earnings which is a low multiple, considering the company’s high growth rates.  However, it’s probably best to stay clear of SMCI stock at the moment given that we can’t reliably depend on the company’s earnings reports given the red flags raised by multiple parties. If there are indeed inaccuracies in the company’s financial statements, shareholders may be making decisions based on incorrect information. The threat of a potential delisting could also drive a sell-off in the stock in the coming days.

[1] Returns as of 11/13/2024
[2] Cumulative total returns since the end of 2016

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