It’s been a rollercoaster ride for Super microcomputers(NASDAQ: SMCI) stocks this year, with many big moves in both directions. After a strong start to the year, the company’s shares began to fall following a brief report from Hindenburg Research that accused the company of accounting manipulation. Shortly after, the company delayed filing its annual 10-K report.
HeWall Street Journal It later reported that Supermicro was being investigated by the Department of Justice (DOJ) for possible accounting problems, adding fuel to the fire, although the report was never confirmed by the company or the DOJ.
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The stock subsequently soared after the company announced that it had been shipping more than 100,000 graphics processing units (GPUs) per quarter.
That rally, however, faded upon news that its auditor, Ernst and Young, was resigning and that it would need to find a new auditor to present its annual report. This delay put the company at risk of having its shares delisted. Nasdaq Stock Market.
Supermicro shares took a fresh hit after the company announced preliminary fourth-quarter numbers that fell well short of expectations. However, the stock returned to recovery mode after the company announced it had found a new auditor.
So far this year, the stock is down modestly, around 7% at the time of writing, although it tends to make some pretty big moves in a short period of time. In that context, let’s take a closer look at the company’s latest news and see if investors should consider buying shares at current levels.
Supermicro shares soared more than 30% after appointing BDO as its new auditor. Ernst and Young had previously resigned, issuing a rather harsh statement, saying that it was “unwilling to be associated with the financial statements prepared by management” and that it had concerns about Supermicro’s governance, transparency and internal controls.
The firm had only been Supermicro’s auditor since March 2023, after taking over from Deloitte & Touche.
So getting BDO, one of the world’s five largest accounting firms, to take over is a big potential win for the company. In a statement, Supermicro said: “This is an important next step in updating our financial statements, an effort we are undertaking with diligence and urgency.”
In addition to announcing a new auditor, Supermicro also said it filed a compliance plan with Nasdaq in hopes of getting a filing extension and remaining listed on the exchange. If the company were to go private, its shares would still be traded, but they would now be on the over-the-counter (OTC) market. This could lead to its removal by S&P 500 index, which it just joined earlier this year.
Image source: Getty Images.
Supermicro is a company that has benefited greatly from artificial intelligence (AI) infrastructure, helping to design and assemble servers and rack systems for customers. It has found a nice niche by being one of the first companies to adopt direct liquid cooling (DLC) solutions to help keep these systems, which can heat up and overheat, cool.
That said, it is also in a more commoditized business, with low gross margins. The company has had margin problems and its latest revenue figures were also well below estimates. That said, its revenue still rose more than 18% year over year last quarter, despite missing its previous forecast.
Meanwhile, from a valuation perspective, it trades at a forward price-to-earnings (P/E) ratio of about 9.5 times current fiscal year analyst estimates. If those numbers hold up, this is a very cheap valuation for a company growing as quickly as Supermicro.
SMCI PE Ratio data (ahead) from YCharts.
The caveat is that Supermicro is currently under a lot of scrutiny around its numbers. The SEC has fined the company in the past for its accounting, while the combination of the brief report, the possible investigation by the Department of Justice and the resignation of its auditor does not look good.
However, this is a real business that is experiencing a lot of demand, so if the company was simply “smoothing” the numbers to meet forecasts, the consequences down the road might not be so bad.
I think investors can consider taking a small position in Supermicro based on its valuation and its role in building AI infrastructure, but this would be a speculative position only for risk-tolerant investors.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Supermicro stock soars as it seeks to avoid delisting. Is now a good time to buy weakened stocks? was originally published by The Motley Fool
