Super Micro Computer (SMCI) has been making headlines with a rollercoaster stock performance. On Nov. 18, shares surged over 15%, followed by a 27% gain in pre-market trading this morning.
The company’s latest efforts to defend its Nasdaq listing and appoint a new independent auditor, BDO USA, have investors taking notice, leading to the spike in its share price.
A Crucial Move: BDO Joins as Auditor
Late Monday, Super Micro’s Board of Directors announced that BDO USA will step in as the company’s independent auditor. This appointment is seen as a significant step toward restoring investor confidence and ensuring compliance with Nasdaq listing requirements.
Charles Liang, Super Micro’s President and CEO, expressed his optimism: “This is an important next step to bring our financial statements current, an effort we are pursuing with both diligence and urgency.”
The company also submitted a compliance plan to Nasdaq, seeking an extension to meet the exchange's listing requirements. Super Micro is working to complete its overdue financial filings, which has raised concerns about its standing on the exchange.
A Troubled Past: Why Investors Are Cautious
While the recent developments are positive, it’s important to remember the challenges Super Micro has faced in recent months:
- Hindenburg Report: In August, activist short-seller Hindenburg Research accused Super Micro of accounting fraud and export control violations.
- Missed Financial Filings: The company failed to submit its annual report for the fiscal year ended in June, raising red flags.
- Federal Investigation: The Wall Street Journal reported that the Department of Justice is investigating the company’s accounting practices.
- Auditor Resignation: Ernst & Young (EY) resigned as Super Micro’s auditor in October, further unsettling the market.
These events significantly eroded trust, making the company’s efforts to regain compliance and transparency all the more critical.
Financial Challenges: Mixed Signals Ahead
Despite the buzz around its new auditor, Super Micro’s financial outlook remains mixed. The company recently provided preliminary results for Q1 FY2025, revising its revenue guidance downward:
- Net Sales: Now expected between $5.9 billion and $6.0 billion, down from a previous range of $6.0 billion to $7.0 billion.
- Adjusted Gross Margin: Estimated at 13.3%, reflecting ongoing profitability challenges. Notably, gross margin dropped to 11.2% in Q4, compared to 17% in the same quarter last year. The decline is partly due to a higher mix of lower-margin hyperscale data center projects and additional costs tied to its Direct Liquid Cooling (DLC) components. Supply chain bottlenecks are also putting pressure on shipments and margins.
For Q2 FY2025, Super Micro projects net sales between $5.5 billion and $6.1 billion, with adjusted earnings per share (EPS) between $0.56 and $0.65.
Bright Spots in AI and Cloud Markets
Despite its hurdles, Super Micro operates in promising, high-growth areas like artificial intelligence (AI) and cloud storage. The company has seen robust demand for its next-generation air-cooled and DLC rack-scale AI GPU platforms, particularly for generative AI workloads. A strong design win pipeline and backlog could support future growth, provided the company successfully navigates its current challenges.
What Should Investors Do?
Here’s a breakdown based on different investment strategies:
- Consider Buying If: You’re a risk-tolerant investor confident in Super Micro’s ability to resolve its legal and regulatory issues. You believe in the company’s long-term growth potential in the AI and server markets.
- Consider Selling If: You’re concerned about ongoing investigations and regulatory risks. You prioritize stability and consistent returns in your portfolio, and might prefer alternatives with strong growth drivers. For example, Dell (DELL) stands out as a promising option. The company is riding high on the booming demand for AI infrastructure, with its servers and networking business recently setting a new record. This growing segment could offer steady performance and long-term growth potential.
- Steer Clear If: You prefer to wait for more clarity on Super Micro’s financials and compliance status before making a move. Notably, Nasdaq is expected to take about two weeks to review SMCI's submitted compliance plan.
Bottom Line
Super Micro’s recent rally is undoubtedly eye-catching, but the stock remains a high-risk, high-reward proposition. While its potential in the AI and server markets is compelling, regulatory uncertainties and declining margins could weigh heavily on future performance.
Wall Street analysts have pulled back from their previously bullish stance on Super Micro Computer stock, which now has a “Hold” consensus rating. Given the regulatory and financial uncertainty, the stock is likely to remain volatile.
