What Should Investors Do If Super Micro Stock Is Delisted?

Super Micro Computer stock (NASDAQ: SMCI) is seeing a real possibility of being delisted from the Nasdaq in the coming days. The company faces a November 16th deadline to either file its delayed 10-K annual report or submit a plan with the SEC to regain compliance. Things don’t look good for the server hardware major given that it doesn’t have a public accounting firm to sign off on its financial statements after Ernst & Young resigned as its accountant in October. So if you’re a Super Micro shareholder, what are your options at this point? For context, this isn’t the first time Super Micro has faced delisting. Back in 2018, it was removed from the Nasdaq after an SEC investigation into its revenue recognition practices. It wasn’t until around two years later, after settling with the SEC, that it was relisted. So, what happens if SMCI stock gets delisted yet again? See our analysis Will Super Micro Stock Be Delisted?

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. So what lies ahead for Super Micro stock and its investors?

If Super Micro stock is delisted, investors will still hold their stock, although trading will move to so-called “Pink sheets,” which are traded on the over-the-counter markets. There are a couple of drawbacks to OTC stocks though. Trading costs become higher. Liquidity in these markets is also lower, with fewer buyers and sellers.  While all major retail brokerages offer trading of OTC stocks, transaction costs are higher due to increased fees and potentially wider bid-ask spreads, meaning that investors might end up paying more or selling for less than they would have liked to. Further, the regulations governing OTC markets are less strict than those on major exchanges.  This can translate into even less transparency for investors, which is risky for stocks like Super Micro which are faced with accusations of accounting irregularities. When stocks are traded on an exchange, they are held to certain listing standards by regulators, but this isn’t the case with delisted stocks.

So yes, investors will still be able to hold SMCI stock even if it gets delisted. But the real question probably is, should they? On the face of it, Super Micro’s core business appears to have been doing well. The company, which sells server systems, and management software, and provides installation and maintenance services, is benefiting from a surge in demand led by the generative AI trend. Revenues more than doubled in FY’24 and consensus estimates point to another 80% jump in revenue for this fiscal year. See Trump’s Surprise Boost To AI Stocks.

That said, it’s probably a good idea to stay cautious with SMCI right now as investors face fundamental questions as to whether they can actually trust the financial numbers. Multiple red flags have been raised, and if the company’s statements aren’t accurate, one could be making decisions based on faulty information. If the stock is delisted and moved to the OTC market, its stock price and earnings multiple could be hit further. This is what happened the last time the company was delisted in 2018 and this could very well happen again. There are also concerns about how these issues could impact Super Micro’s core business. Customers might start pulling back on their orders as they might be uneasy about signing contracts with a company facing financial uncertainty. Suppliers could become skittish as well. Take Nvidia, for instance. The GPU major could start thinking twice about sending their much sought-after GPUs to Super Micro, opting to boost supply to other more stable players such as Dell instead. If that happens, Super Micro’s revenues and profits could be impacted further. In addition, see should you Buy, Sell, or Hold Nvidia stock?

[1] Returns as of 11/15/2024
[2] Cumulative total returns since the end of 2016

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