Super Micro Computer (NASDAQ: SMCI) may be the most exciting stock story of 2024. Unfortunately, it's not for a good reason. While it started off the year hot as product demand surged, it quickly declined as expectations were too high. Then, allegations of an accounting irregularities broke, which caused the stock to tumble as more information surfaced about the company's practices.
The stock is now down more than 25% for the year and more than 80% from its all-time high, set earlier this year. With that kind of decline, some investors may wonder if it's a stock with some value in it.
While I agree that the stock could have some value in it, there are a ton of red flags around this company that shouldn't be ignored.
2024 has been an interesting year for Supermicro
Super Micro Computer (often called Supermicro) makes components for computing servers and full-scale racks. Its product lineup allowed it to benefit from the same tailwinds that lifted artificial intelligence (AI) giant Nvidia (NASDAQ: NVDA), and the original investment thesis was that Supermicro is a co-benefactor from the AI boom like Nvidia, so it should see similar performance.
That thesis worked perfectly from the start of the year until its peak in March, as it rose 318% (a quadrupling) in just a few months.
Supermicro's stock gradually ticked down, as expectations for the company were much too high compared to what it was delivering. The biggest drop came when famed short-selling firm Hindenburg Research released a short report on the company centered around allegations of accounting malpractice. To make matters worse, Supermicro's management announced that the company was delaying the filing of its end-of-year 10-K form to assess the "operating effectiveness of its internal controls over financial reporting" the day after the Hindenburg report came out.
These allegations also triggered a Department of Justice probe into the company, which is never a good sign.
While this chain of events is obviously a huge red flag, a bigger red flag is that this isn't the first time Super Micro Computer has been caught up in an issue like this. In 2018, Supermicro was delisted from the Nasdaq stock exchange for not filing its statements on time and fined by the Securities and Exchange Commission for previous accounting issues -- something that could happen again if its issues are not resolved.
There's a pattern here, making Supermicro a stock investors need to be careful of. But the latest piece of information in this saga is probably the biggest one investors must consider, and it isn't good.
Preliminary Q1 results weren't rosy, even if you can believe what management is telling you
Supermicro's financial results were impressive throughout 2024 -- if you can trust what management says. However, Supermicro's auditor says you can't.
Ernst & Young, Supermicro's auditor, resigned after stating it was "unwilling to be associated" with management's financial reporting. That's a huge red flag for investors, as auditors have access to information that the general public does not. If they run for the hills, then investors should likely follow suit.
I sold all my shares after this news broke. Even if this issue is resolved, investors will likely avoid the company for some time because it cannot be trusted.
Furthermore, Supermicro issued a preliminary first-quarter fiscal year 2025 (ending Sept. 30) update, and the results weren't good. Originally, management projected revenue of between $6 billion and $7 billion for the quarter. Now, it expects revenue of between $5.9 billion and $6 billion. For the second quarter, revenue is expected to be between $5.5 billion and $6.1 billion, which puts it well behind the pace it would need to hit management's previous projection of $26 billion to $30 billion in revenue for the year.
It's unknown if this revenue discrepancy is a result of Supermicro's accounting getting sorted out or if business is falling, but either way, it's not what investors want to see.
If everything gets resolved, Supermicro's stock may have some value, but it's far too muddy for most investors to determine. With so many other better investment options available, investors would likely be better off considering some of those, rather than taking a huge risk in investing in Supermicro.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.
