Supermicro Shares Plunge Again. Time to Buy the Dip or Stay Away?

The saga around Super Micro Computer (NASDAQ: SMCI) continued with the stock plunging on news that its auditor has resigned. The stock has bounced around like a ping-pong ball this year, with a number of extreme moves to both the upside and downside. Now the stock is down 9% year to date.

Let's take a closer look at some of recent drama around the stock and see if we can determine whether the stock is a buy or if it best to just stay away.

Questionable accounting allegations

The latest plunge in Supermicro stock stems from its auditor, Ernst and Young, resigning, with the accounting firm saying it was "unwilling to be associated with the financial statements prepared by management." It said its resignation stemmed from recent information that has come to its attention, although in July it had raised concerns about Supermicro's governance, transparency, and internal controls.

For its part, Supermicro said it disagreed with Ernst and Young's assessment and that it does not expect to have to issue any restatements to its financial reports. It is currently looking for a replacement accounting firm to conduct its audit. This fiscal year was the first year that Ernst and Young was conducting an audit for the company.

Supermicro's accounting first came into question in the public sphere back in August when short-seller Hindenburg Research accused the company of accounting manipulation, as well as evading sanctions and management self-dealings with related third parties. Its accusations were meant to help drop the stock price to its benefit, which it has succeeded in doing. Short-selling is when an investor borrows a stock from a current shareholder and then immediately sells it with the plan of buying it back later at a lower price.

Supermicro didn't do itself any favors when shortly after the short report it decided to delay the filing its fiscal 2024 annual report with the Securities and Exchange Commission (SEC) to review the "design and operating effectiveness of its internal controls over financial reporting." The Wall Street Journal, meanwhile, later reported that the company's accounting was allegedly being investigated by the Department of Justice (DOJ), which also sent Supermicro's stock tumbling.

Notably, Ernst and Young's initial concerns came out before the Hindenburg short report. This also isn't the first time the company has run into potential accounting issues. Back in 2020, the SEC fined Supermicro for prematurely recognizing revenue and understating expenses, noting that employees were encouraged to ship products to warehouses at quarter-end, upon which it recognized the revenue even though the products had yet to reach customers. CEO Charles Liang was fined $2.1 million, but was not charged with any wrongdoing.

Image source: Getty Images.

Buy the dip or stay away?

While Supermicro has not been found guilty of anything, there have been a lot of unfavorable accusations piling up against the company and it has a recent history of accounting manipulation. Thus, investors need to consider that this is a pretty big risk.

At the same time, Supermicro is a real company that has been benefiting from the artificial intelligence (AI) infrastructure buildout. It designs and assembles servers and rack solutions for customers and has carved out a niche by being one of the first sever companies to embrace direct liquid cooling (DLC) in its setups. AI-powered servers consume a lot of energy and generate a lot of heat and must be kept cool, and DLC is proving to be a strong solution.

Supermicro recently announced that it has deployed more than 100,000 graphic processing units (GPUs) with DLC solutions, and the company's products generally get good reviews. However, this is a low-margin business, and the company was seeing margin pressure in its last quarter, fiscal Q4, when gross margin dropped to 11.2% from 17% a year ago. By comparison, chipmakers such as Nvidia and Broadcom have been producing gross margins around 75%.

While I don't think we've seen the last shoe drop when it comes to Supermicro nor do I think it is a great business, I do think that it has been a real beneficiary of the AI buildout and that this is likely to continue. Meanwhile, the stock has gotten pretty inexpensive given the growth opportunities in front of it, even if it was "smoothing out" quarterly results.

SMCI PE Ratio (Forward 1y) data by YCharts

Taken altogether, risk-averse investors should stay far away from the stock, which is what I'd personally do. However, more risk-tolerant investors could consider taking a small flier position in the stock based on its AI opportunities and valuation.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.