What is going on at Super Micro Computer (NASDAQ: SMCI)?
Shares of the once high-flying artificial intelligence (AI) server company have collapsed after a growing scandal has enveloped the business.
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This timeline shows how the story has unfolded:
Aug. 27: In a short-seller report, Hindenburg Research accuses the company of accounting manipulation, self-dealing, sanctions evasion, and channel stuffing. The stock plunges.
Aug. 28: Supermicro files notice that it's unable to submit its 10-K in a timely manner. At the time, it said it needed more time to "complete its assessment of the effectiveness of its internal controls over financial reporting." It also said it didn't anticipate any changes to the fiscal 2024 results it had reported on Aug. 6.
Sept. 3: Supermicro sends a letter to customers and partners, reasserting it didn't anticipate material changes to its fiscal 2024 results. It also called the short-seller report false and inaccurate while reminding customers that recent events don't impact its products.
Sept. 20: Supermicro says it received a letter from Nasdaq saying it was out of compliance because of its late 10-K filing. The company has 60 days to regain compliance or submit a plan for doing so.
Sept. 26:The Wall Street Journal reports the Justice Department is investigating Super Micro Computer, apparently in response to accusations from a former employee about accounting violations.
Oct. 30: Supermicro says its auditing firm, Ernst & Young (EY), has resigned. In July, EY had communicated concerns about Supermicro's financial reporting, warning that a timely filing of the 10-K was at risk. EY ultimately told the company it couldn't rely on management's representations and is unwilling to be associated with the financial statements prepared by the company.
Supermicro reported preliminary first-quarter results, and the numbers were both incomplete and below expectations. It said revenue would fall in the range of $5.9 billion to $6.0 billion, below its previous guidance of $6.0 billion to $7.0 billion. On the bottom line, it expects adjusted earnings per share of $0.75 to $0.76, at the middle of its previous range of $0.67 to $0.83.
For the fiscal second quarter, management sees revenue falling sequentially to $5.5 billion to $6.1 billion with adjusted earnings per share of $0.56 to $0.65.
Management also noted its Independent Special Committee found the Audit Committee "acted independently," contrary to EY's concerns that it was influenced by the CEO. In the press release, the Special Committee said:
[T]here is no evidence of fraud or misconduct on the part of management or the Board of Directors. The Committee is recommending a series of remedial measures for the Company to strengthen its internal governance and oversight functions, and the Committee expects to deliver the full report on the completed work this week or next.
Despite this update, Supermicro still has no timeline for when it will file its 10-K, though it intends to do so according to Nasdaq's compliance rules.
What investors need to hear from the company
At this point, Supermicro is two quarters behind on its financial reporting. The stock is down over 50% since the release of the Hindenburg report, and it has fallen 80% from the all-time high it reached in March.
In the meantime, the company needs to hire a new auditor, and management should share a plan to rectify that problem as soon as possible.
Management also needs to complete the filing of its 10-K and give investors a reasonable expectation of when the filing will take place, or at least shed light on the issues preventing it from happening. Management mostly avoided discussing those problems on the most recent earnings call.
Though management insists no material changes will need to be made to its fiscal 2024 results, the allegations from Hindenburg Research, EY's resignation, the possible DOJ investigation, and Supermicro's own inability to resolve the matter in more than two months indicate this could be more than a run-of-the-mill procedural error. Despite what management has said, financial restatements are possible and could go back quarters or even years.
What should investors do?
Until investors get more transparency from management and see that it's clearly taking steps to regain compliance, the stock should be avoided. For current shareholders, making the decision to sell is more difficult as the stock has already fallen so far, but the reality is Supermicro's sell-off may not be over.
It's easy for the business to spiral from here if it loses trust with its customers. Reports are now emerging that Nvidia, Super Micro Computer's most important supplier, is redirecting its in-demand chips to other server companies, fearing a crackdown on Supermicro related to any DOJ investigation and potential damage to its own reputation.
It's time for management to come clean with investors and stop obfuscating. If it doesn't resolve some of these problems by the end of the month, it faces a real threat of being delisted from the Nasdaq, which would make it even more difficult to restore its reputation with investors.
Super Micro Computer is running out of time, and it needs to act.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
