Super micro computer (NASDAQ: SMCI)an AI server manufacturer, has taken investors on a wild ride over the past three months.
The company’s problems began with a short-selling report from Hindenburg Research at the end of August, which alleged a wide range of accounting irregularities. A brief delay in filing its 10-K application followed, and in September, the Department of Justice reportedly opened an investigation into the company. She also received a delisting warning Nasdaq stock market. Last month, the company’s problems came to a head when… auditorErnst & Young resigned, and also postponed the presentation of its 10Q10 data. It released preliminary results for the first quarter but was unable to release a full report, and the stock continued to rise, hitting an intraday low of $17.25 on November 15 before a deadline set by Nasdaq to remain in compliance. This represents a 69% decline from before the short seller’s attack.
Missing your morning scoop? Wake up with Breakfast news In your inbox every market day. Register for free »
However, since then, Supermicro has had some redemption with investors as it appointed a new auditor and submitted a compliance plan to the Nasdaq. As of November 22, the stock is up 92% from its November 15 low.
Investors clearly see recovery potential in Supermicro stock, but if you’re considering buying it, you should understand the risks the company still faces. Let’s review some things you should know.
Investors cheered on November 18 when Supermicro announced it had appointed 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 accounts in a 2018 audit.
The Public Company Accounting Oversight Board’s Audit Quality Report found significant errors in 54% of BDO’s audits from 2020 that it examined and 53% in 2021. BDO also said it has made investments to improve the quality of its audits, recognizing its past efforts. mistakes.
BDO’s own challenges do not suggest anything nefarious in Supermicro’s employment of them, but they may also leave room for doubt if and when Supermicro submits its pending reports. Nor does this negate Ernst & Young’s decision to resign as auditor, and its comment that it was “unwilling to be associated with the financial statements prepared by management.” That Ernst & Young also said it could not rely on management’s representations remains troubling.
Super Micro Computer is still listed on the Nasdaq and its letter to Nasdaq has bought it more time, but it remains out of compliance.
In fact, Nasdaq sent Supermicro another letter on November 20 saying it was not complying with Nasdaq listing rules. “The letter has no immediate impact on the listing or trading” of its shares on the Nasdaq, Supermicro said.
Relatedly, investors are still waiting to see the report of Supermicro’s independent special committee, which was supposed to report on remedial measures to improve its internal management by November 15. The delay in this report does not seem reassuring.
Supermicro continues to say it expects to file a 10-K, though it can’t predict when that will happen.
It’s not clear what the problem is with Supermicro’s accounting, but the Hindenburg report makes a wide range of accusations against the company, including stuffing channels to create inappropriate revenues, recognizing incomplete sales, and avoiding internal accounting controls. It also described conflicts between related parties and transactions between related parties that were not disclosed.
The financial disagreements between management and Ernst & Young are likely to be deep and fundamental, as it is unusual for an auditor to resign.
Supermicro may be able to overcome these issues in the long term. After all, the company makes real products and has been name-checked before Nvidia on her recent earnings call as one of the many partners she works with.
At this point, Supermicro is in better shape than it was when it didn’t have an auditor and the Nasdaq deadline was looming, but that’s very different from having its financial reports in good shape. The longer the delay in filing, the worse it looks for Supermicro, and the more widespread its accounting problems are likely to be.
Another pullback in the stock seems likely given that Supermicro has yet to correct any of the original issues that caused the stock to decline. Investors should treat the stock with caution. They are not suitable for long-term investment until there is more clarity about accounting irregularities.
Before you buy shares in Super Micro Computer, consider the following:
the Motley Fool stock advisor The analyst team has just defined what they think it is Top 10 stocks Investors are buying it now… and Super Micro Computer wasn’t one of them. The 10 stocks that were discounted could deliver huge returns in the coming years.
Think when Nvidia I prepared this list on April 15, 2005… If you invested $1,000 at the time of our recommendation, You will have $829,378!*
Stock advisor It provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. the Stock advisor The service has More than four times The return of the S&P 500 since 2002*.
*Stock Advisor returns as of November 25, 2024
Jeremy Bowman He has no position in any of the stocks mentioned. The Motley Fool has positions on and recommends Nvidia. The Motley Fool has Disclosure policy.
Are you thinking about buying Super Micro Computer stock? 3 things you should know Originally published by The Motley Fool