Why Super Micro Stock Surged 30% On Monday

Server maker Super Micro Computer stock (NASDAQ: SMCI) extended its recent rally, gaining close to 29% on Monday. The gains follow the company’s release of an investigation into its accounts conducted by a special board committee, along with attorneys, and a forensic accounting firm, which found no evidence of fraud or misconduct by management. The stock now trades at $42 per share, up about 133% from recent lows seen around mid-November. Want to profit from shifts in the AI market? Consider Selling Nvidia and Buying AMD Stock.

Super Micro has been facing a potential delisting from the Nasdaq exchange for failing to file its financial reports, namely its 10-K filing for the fiscal year ending June 2024 and its September quarter report. During this period, its public auditor Ernst & Young resigned, after it raised concerns regarding the accuracy of the company’s financial statements. However, the server major has since appointed a new auditor BDO which is reviewing the company’s financials following Ernst & Young’s resignation. Now completing the internal investigation could help the company make progress with filing its audited financials with the regulator, enabling it to regain compliance.

Now, 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 60% from its all-time highs seen earlier this year. So does this make SMCI stock attractive?

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 mixed corporate governance track record and questions about its financial reporting. While the stock trades at a very reasonable 15x consensus 2024 earnings, it might be wise to wait until its new auditor signs off on the financials before considering an investment.

[1] Returns as of 12/3/2024
[2] Cumulative total returns since the end of 2016

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