Super Micro Computer stock (NASDAQ: SMCI) gained about 15% in Thursday’s trading and remains up by close to 66% over the past week. The gains come as the company appears to have bought itself more time from being delisted from the Nasdaq exchange amid delays in filing its financial reports. On Monday, the company said that it had hired BDO as its public auditor, replacing Ernst & Young, which resigned in October after it raised concerns regarding the company’s financial statements. With a new auditor on board, Super Micro says that it will file its two financial reports, namely its overdue 10-K report for the fiscal year ending June, as well as its most recent quarterly filing for the September quarter, although no specific timeline was provided. The company has also submitted a compliance plan to the Nasdaq stock exchange. Now even post the current rally, SMCI stock remains down by over 70% from all-time highs seen earlier this year. The stock also trades at a reasonable multiple of just around 10x consensus FY’25 earnings. But is this the right time to buy SMCI? Probably not. Here’s why. As an aside, are you looking at big tech stocks? Here’s What’s Happening With Google Stock
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 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’s our stance on SMCI stock?
Super Micro Computer has been a big winner in the generative AI space, as demand for its server systems surged. Revenues more than doubled in FY’24, with consensus estimates pointing to an additional 80% increase for the current fiscal year. Although the server market is commoditized, Super Micro has some advantages, given that its products are seen as more customizable and energy-efficient than those of rivals. Super Micro has a long-standing partnership with AI chip giant Nvidia, which could give it a competitive edge. Nvidia’s latest chips and products are reportedly easier to integrate with Super Micro’s servers compared to those of its peers. During its quarterly earnings call this week, Nvidia highlighted several key partners, including Super Micro, Dell, and Lenovo. SMCI investors might view it as a positive that the relationship remains strong despite the company’s ongoing corporate governance issues. This also reinforces confidence that Super Micro’s underlying business is legitimate and ongoing.
That being said, the stock is still risky in our opinion. While the company has potentially delayed its delisting, the core issues with the company’s accounting have yet to be resolved. The strong AI growth story and robust demand for Super Micro’s products don’t compensate for the fact that the company faces serious corporate governance concerns and questions about its financial reporting. In August, Hindenburg Research pointed to multiple red flags in the company’s accounting practices, and 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.
Hiring a new auditor is a step forward, but investors must also consider why a Big Four auditing firm like Ernst & Young declined to associate with the financial statements prepared by the company. 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. If financial inaccuracies exist, shareholders could be making decisions based on misleading information. Given these risks, it’s probably best to exercise caution with SMCI stock. Are you a more risk-averse investor? Check out if you should Buy, Sell Or Hold CSCO Stock?
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