What’s Next For Super Micro Stock?

Server maker Super Micro Computer stock (NASDAQ: SMCI) extended its recent rally, gaining close to 30% over the last five trading days. The stock now trades at $35 per share, up about 2x from recent lows seen around mid-November, when investors were concerned about the company’s potential delisting from the Nasdaq exchange.  Last week, the company said that it had hired BDO as its public auditor, replacing Ernst & Young, who resigned in October after it raised concerns regarding the accuracy of the company’s financial statements. With the new public auditor on board, Super Micro is expected to gain additional time to avoid delisting from Nasdaq as it works to file its overdue 10-K for the fiscal year ending June 2024 and its September quarter report.

Looking over a longer period, 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.  Now even considering the strong historical performance and the recent rally, SMCI stock is still down by a massive 70% from its all-time highs earlier this year. The stock also trades at just about 9x projected 2025 earnings. However, jumping into SMCI stock might not be a wise move just yet, in our view.  Here’s why.

Significant risks remain for Super Micro. The company’s new auditor will have to rework its financial statements and this process will likely take time. Super Micro has only indicated in filings that it plans to submit its overdue financial reports, but has not provided a specific timeline. Separately, earlier this week, the company announced it had prepaid borrowings from Bank of America and Cathay Bank. Some of the debt had covenants that required the company to file its FY 2024 and most recent quarterly financial statements by December 31. On the upside, by fully prepaying these loans, SMCI has eliminated the need to meet this reporting deadline. On the downside, this could also signal that there could be further delays in filing its audited accounts.

Now, Super Micro Computer has been a big winner in the generative AI space, as demand for its server systems surged as companies looked to deploy the latest GPUs using the company’s server solutions. Revenues more than doubled in FY’24, with consensus estimates pointing to an additional 80% increase for the current fiscal year. However, the AI growth story doesn’t compensate for the company’s corporate governance concerns and questions about its financial reporting. Want to profit from shifts in the AI market? Consider this trade Sell Nvidia, Buy AMD Stock

The company’s recent troubles began in August after short-seller Hindenburg Research pointed to multiple red flags in the company’s accounting practices. Further, 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. 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. It also remains to be seen if the new auditor will indeed sign off on the company’s accounts. Given these risks, it’s probably best to exercise caution with SMCI stock until there are signs that the company’s core accounting issues have been be resolved.

[1] Returns as of 11/28/2024
[2] Cumulative total returns since the end of 2016

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