Demand for Supermicro’s products has increased with the artificial intelligence boom.
super microcomputer (SMCI -3.77%) started the year as a star in the artificial intelligence (AI) market. The equipment maker has been selling servers and rack-scale solutions for more than 30 years, but the AI boom really took off. In recent quarters, Supermicro has reported triple-digit revenue growth and a surge in demand for its products. The company works with Nvidia and other top chip makers to incorporate their innovations into its equipment.
All of this has helped the stock rise 2,000% in the past five years through 2023, and is up 188%, outpacing NVIDIA’s performance in the first half of this year. Then, in late August, problems began to weigh on this top stock. From short reports alleging problems at the company to the recent resignation of Supermicro’s auditors, these have been difficult times for Supermicro and its investors. Since the Aug. 27 short report, the stock price has fallen about 60%.
More news arrived this week, with Supermicro releasing a preliminary, unaudited quarterly earnings report and general updates. Here’s what you need to know before deciding to invest.
Image source: Getty Images.
It all started with a short report…
First, let’s consider the factors that are putting pressure on stock prices. It all started with a short report from Hindenburg Research alleging problems at the company, including “obvious accounting red flags.” Hindenburg was biased because it held a short position in the stock at the time of the report, meaning it benefited from a decline in the stock price. This makes it impossible to rely completely on Hindenburg as a source of information.
Meanwhile, Supermicro has postponed filing its 10-K annual report. While this may not have been a clear reason to sell or avoid the stock, it still weighed heavily on investors’ minds.
Supermicro addressed both the Hindenburg report and the 10,000-hour delay in a letter to customers and offered words of encouragement. Supermicro claimed the brief report was “false or inaccurate” and said it did not expect any material changes to its fourth quarter or full-year earnings regarding the 10,000 lag.
But when a Wall Street Journal article mentioned a possible Justice Department investigation into Supermicro (Supermicro declined to comment), and when Ernst & Young resigned as Supermicro’s auditor. , investors’ concerns deepened.
Resignation from Ernst & Young
At the time of his resignation, Ernst & Young said it “can no longer rely on the representations of management and the audit committee” and “desires no connection with the financial statements prepared by management.”
Now, let’s move on to the update from Supermicro. Ernst & Young initially raised concerns about internal controls in July, and Supermicro’s board established an independent committee to review the situation. The special committee completed its investigation and issued a statement during this week’s Supermicro earnings call, saying, “The audit committee acts independently and there is no evidence of fraud or wrongdoing on the part of management or the board.” No. The committee is fair.” We are recommending a series of corrective actions to strengthen our internal governance and oversight functions (.).”
Meanwhile, Supermicro says it continues to work on the 10-K, but cannot yet predict when the report will be completed. This is concerning because the company faces the risk of being delisted from the Nasdaq if it does not file a report or plan to address the situation later this month. Supermicro received a letter of non-compliance from Nasdaq in September.
Supermicro Preliminary Earnings Report
At the same time, in line with its unaudited fiscal first quarter earnings, the company now expects net sales to be between $5.9 billion and $6 billion, down from its previous guidance of $6 billion to $7 billion. states. This still represents a triple-digit increase year-over-year, and progress is progressing well with Supermicro’s partners and new production center in Malaysia.
The company said it expects direct liquid cooling (DLC) market share to be at least 10 times that of last year this fiscal year as the AI market takes over technology for cooling data systems and data centers. Supermicro says its Blackwell-powered rack-scale solution, the Nvidia GB200 NVL72, is “ready to go,” as well as its Advanced Micro Devices’ MI300 and MI325 platforms and Intel Gaudi 3 solutions .
There have been reports that Nvidia has redirected orders to other vendors, but Supermicro said on a conference call with analysts that “allocations remain unchanged.”
Finally, the Malaysian facility, scheduled to open later this quarter, will help Supermicro increase production and reduce costs. This is good news for profits.
What should investors do?
Given all this, what should investors do? Supermicro has become an industry leader in recent years and is likely to continue growing in this high-growth environment even after navigating these difficult waters. . However, despite these positive points, it is impossible to paint a clear picture of the future if there are questions about internal controls or financial reporting. Before investing in a company, it’s important to trust the management team and understand the company’s financial health.
That means investors can’t invest wisely in Supermicro right now, no matter how promising the market and the company’s technology may seem. But that doesn’t mean you should forget about this AI giant completely. Instead, it’s best to keep an eye on how this story unfolds and only make investment decisions when you have all the facts.
Adria Cimino has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends the following options: $24 November 2024 short call on Intel. The Motley Fool has a disclosure policy.
