At the beginning of this year, super microcomputer(NASDAQ:SMCI) reigned with NVIDIA as the best performing stocks on the market. Supermicro advanced 188% in the first half, while Nvidia rose 149%.
Why did this 30-year-old company suddenly jump into the spotlight? The equipment maker, which provides things like servers for artificial intelligence (AI) data centers, saw its profits soar amid the AI boom.
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But this growth story has dimmed of late as problems for the company began to pile up, and all of this has led to a more than 60% drop in the stock since late August. A brief report talked about problems at Supermicro, a newspaper article talked about a possible Justice Department investigation, and recently, Supermicro’s auditor, Ernst & Young, resigned from his position.
At the same time, Supermicro has been late in financial reporting and several weeks ago said its annual 10-K report would be late. And just this week, the company said it wouldn’t be able to file its report for the quarter ended Sept. 30 on time. Have Supermicro’s problems worsened?
Image source: Getty Images.
First, a bit of detail on the various headwinds, starting with the brief report released in late August. In the document, Hindenburg Research alleged a variety of problems, including “glaring accounting red flags.” It’s important to note that at the time of the report, Hindenburg had a short position in Supermicro, so it would benefit if the stock fell. This bias makes it difficult for investors to trust Hindenburg as a source of information about the equipment manufacturer.
The Wall Street Journal He later reported an investigation into Supermicro launched by the Department of Justice. Both the U.S. attorney’s office and the company declined to comment.
Finally, auditor Ernst & Young, after questioning the company’s internal controls in July, recently resigned, saying he is “unwilling to be associated with financial statements prepared by management.” Supermicro’s board of directors appointed a special independent committee to review the situation, and the committee recently said there is “no evidence of fraud or misconduct by management or the board of directors.” Although the committee has not officially completed its review, these words represent good news for Supermicro and its shareholders.
Meanwhile, Supermicro informed the Securities and Exchange Commission (SEC) that it would be late in filing its annual 10-K report, a move that prompted Nasdaq to send the company a non-compliance letter. Supermicro now has until November 16 to file or present a plan to regain compliance. Failure to comply eventually results in delisting, an outcome that would definitely be bad news.
If Supermicro were delisted, the shares would trade on the over-the-counter (OTC) market. Volume is lower in the OTC market and transaction costs are higher, which could affect demand for the stock. Additionally, a delisting would further impact investor confidence in the company’s management.
Now we come to the latest news: this week, Supermicro said it would also not be able to file its 10th quarter quarterly report on time. This is not necessarily a surprise since the company does not have an auditor at this time and must hire one to review the financial statements included in the 10-Q. As Supermicro noted in its filing to the SEC, the 10-Q cannot be filed before the 10-K annual report.
Does this mean that Supermicro’s problems have deepened? Not necessarily.
As mentioned, it was clear that without an auditor, Supermicro would be left in the dark when it came to financial reporting. So the company’s problems today are the same as when Ernst & Young resigned a couple of weeks ago.
From here, what could help Supermicro in the short term is to find a new auditor so that the company can advance its reporting. Without that, it will be very difficult for Supermicro to continue attracting investors. After all, investors want to have a clear idea of a company’s financial situation before investing in stocks. And without an auditor and therefore financial reporting, Supermicro may be on the path to a Nasdaq delisting, another situation that will hurt demand for the shares.
Although Supermicro has become a leader in the AI equipment market and could have a bright future ahead of it, all of these elements add too much uncertainty to the story right now. As an investor, the best thing you can do is keep this player on your watch list (potentially for a time in the future when the situation improves) and monitor this story from the safety of the sidelines.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a disclosure policy.
Did Super Micro Computer’s problems get worse? was originally published by The Motley Fool
