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Super Micro Computer May Have Avoided a Major Risk. Is This Beaten-Down Stock a Buy?
Super Micro Computer(NASDAQ: SMCI) started the year with plenty of promise. The stock soared 188% in the first half, even beating market darling Nvidia, thanks to its dominance in the artificial intelligence (AI) equipment market. Investors piled into the stock as the company reported record demand for its data center equipment from AI customers -- and that resulted in triple-digit revenue growth.
But troubling news started to pile up a few months ago, halting Supermicro's fantastic momentum -- and the shares plummeted. One major issue was the company's announcement that it would delay the reporting of its 10-K annual report, and this called into question its ability to remain listed on the Nasdaq. To make matters worse, Supermicro's auditor resigned in October, making it impossible for the company to proceed with its financial filings.
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Positive news arrived this week, though, sending the shares soaring and igniting investors' hopes for an exciting recovery story. Supermicro said it's hired independent auditor BDO U.S.A. and has submitted a compliance plan to the Nasdaq. With these moves, Supermicro may have avoided a major risk -- delisting from the Nasdaq. Does the news make this beaten-down stock a buy? Let's find out.
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An 800% gain over five years
First, let's walk through the complete Supermicro story. The company, as mentioned, makes equipment like servers and workstations for data centers, and AI customers have been rushing to order as they build out their operations. This helped Supermicro report quarterly revenue this year that surpassed a full year of revenue as recently as in 2021. And this also has pushed the stock higher, not only in the first half but over the past few years -- it's climbed more than 800% over five years.
Supermicro also works hand-in-hand with the biggest chip designers, immediately incorporating their latest innovations into its systems. This means the company could benefit from their successes too, such as Nvidia's upcoming Blackwell launch.
But questions about Supermicro's financial reporting arose in recent months, weighing on the stock. Hindenburg Research released a short report, alleging "glaring accounting red flags" and other problems at the company. The Wall Street Journal then reported a Justice Department Probe into the company -- Supermicro and the U.S. attorney's office declined to comment.
Finally, Ernst & Young resigned as Supermicro's auditor, citing concerns about the company's accounting practices. Meanwhile, Supermicro already had delayed its 10-K annual report -- and received a non-compliance letter from Nasdaq.
Risk of a Nasdaq delisting
The risk here is a delisting, meaning Supermicro shares would then trade over-the-counter (OTC). The problem with that is OTC markets have lower volume, making it more difficult to trade the stock. This clearly would weigh on appetite for Supermicro stock, limiting future gains.
This week, though, with the hiring of a new auditor and the filing of a compliance plan, Supermicro may have eliminated this major risk -- if the company is able to follow through with the plan and submit its financial reports -- the 10-K annual report and a 10-Q report for the latest quarter -- in a timely fashion. In the filing, Supermicro said this is the goal, though it didn't offer a timeline.
Supermicro said in the plan that it believes it can file "within the discretionary period available to the Nasdaq staff to grant."
The stock will remain listed while the Nasdaq reviews Supermicro's plan.
Is this dirt cheap stock a buy?
So now let's get back to our question: Does this latest news make Supermicro a buy? It's true that, if we consider earnings so far and future prospects, the stock looks dirt cheap today, trading at about 8x forward earnings estimates. But the problem is, without the latest, audited earnings reports, we don't have a clear view of the financial picture.
And that makes investing in Supermicro right now very risky. In order to set yourself up for a win in investing, it's crucial to understand a company's financial situation and have access to all of the latest earnings numbers. These will support your decision, so that you won't just bet randomly, hoping for the best.
All of this means that right now, it's still too early to take a chance on Supermicro -- but that doesn't mean you should forget about this company either. Supermicro's products are sought-after, and future prospects look bright, so once we have more clarity on the financial situation, this stock could once again become a top long-term buy.
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Adria Cimino 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.
