super microcomputer (NASDAQ: SMCI)AI server maker, has taken investors on a wild ride over the past three months.
The company’s problems began with a short-seller report from Hindenburg Research in late August alleging a wide range of accounting irregularities. This was shortly followed by a delay in filing its 10-K, and in September the Department of Justice reportedly opened an investigation into the company. He also received a delisting warning from the Nasdaq bag. Last month, the company’s problems reached a fever pitch when its auditor, Ernst & Young, resigned and also delayed its filing of its first-quarter 10-Q report. It released preliminary first-quarter results but failed to release a full report, and shares continued to spiral upward, bottoming out with an intraday low of $17.25 on Nov. 15, ahead of Nasdaq’s deadline to comply. That marked a 69% drop from before the short-seller attack.
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However, Supermicro has since achieved some redemption with investors, as it hired a new auditor and submitted a compliance plan to Nasdaq. As of Nov. 22, shares are up 92% from the Nov. 15 low.
Investors clearly see recovery potential in Supermicro stock, but if you’re thinking about buying it, you need to understand the risks the company still faces. Let’s go over some things you should know.
Image source: Getty Images.
Investors cheered on Nov. 18 when Supermicro announced it had hired BDO USA as its new auditor, but that may be a bigger risk than investors think, as BDO has faced its own regulatory problems.
For example, the company was fined $2 million last year for failing to properly examine revenue estimates in a 2018 audit.
A Public Company Accounting Oversight Board audit quality report found significant errors in 54% of the 2020 BDO audits it examined and 53% in 2021. BDO has also said it has made investments to improve the quality of their audits, recognizing their previous errors.
BDO’s own challenges do not indicate anything nefarious about Supermicro’s hiring, but they could also leave room for doubt if Supermicro files its outstanding reports. Nor does it undo Ernst & Young’s decision to resign as auditor and its comment that it was “unwilling to be associated with financial statements prepared by management.” That Ernst & Young also said it could not trust management’s statements remains worrying.
Super Micro Computer is still listed on the Nasdaq and its letter to the Nasdaq has earned it more time, but it is still not in compliance.
In fact, Nasdaq sent Supermicro another letter on Nov. 20 saying it did not comply with Nasdaq listing rules. Supermicro said: “The letter has no immediate effect on the listing or trading” of its shares on the Nasdaq.
Related to this, investors are still waiting to see the report from Supermicro’s Independent Special Committee, which was supposed to deliver a report on corrective measures to improve its internal governance by November 15. The delay in that report does not seem reassuring.
Supermicro goes on to say that it expects to file its 10-K, although it cannot predict when it will do so.
It’s unclear what the problem is with Supermicro’s accounting, but Hindenburg’s report raises a wide range of allegations against the company, including channel stuffing to generate improper revenue, acknowledging undersales and evading internal accounting controls. . It also described related party conflicts and undisclosed related party transactions.
The financial disagreements between management and Ernst & Young were probably deep and material, since it is very unusual for an auditor to resign.
It is possible that Supermicro can overcome these problems in the long term. After all, the company makes real products and even its name was verified by NVIDIA in its recent earnings call as one of several partners it works with.
At this point, Supermicro is in a better position than when it didn’t have an auditor and the Nasdaq deadline was approaching, but that’s a lot different than having its financial reports up to date. The longer the delay in its filings, the worse Supermicro’s situation will be and the more likely its accounting problems will become widespread.
Another pullback in the stock appears likely, as Supermicro has yet to correct any of the original issues that caused the stock to drop. Investors should approach the stock with caution. It is not suitable for long-term investment until there is more clarity about its accounting misconduct.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a disclosure policy.
Are you thinking of buying Super Micro Computer stock? Three Things You Need to Know was originally published by The Motley Fool
