Super microcomputer (NASDAQ: SMCI)the maker of AI servers, has taken investors on a wild ride over the past three months.
The company’s troubles began in late August with a short-seller report from Hindenburg Research alleging a wide range of accounting irregularities. That was shortly followed by a delay in filing its 10-K, and in September the Justice Department reportedly opened an investigation into the company. It also received a delisting notice from the Nasdaq fair. Last month, the company’s problems reached a fever pitch accountantErnst & Young resigned and also delayed the filing of its first quarter 10-Q report. The company released preliminary first-quarter results but was unable to release a full report, and the stock price continued to spiral, hitting an intraday low of $17.25 on November 15, before the Nasdaq deadline to remain in compliance. That represented a decline of 69% from before the short-seller attack.
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Since then, however, Supermicro has scored some redemption with investors by hiring a new accountant and sending a compliance plan to the Nasdaq. By November 22, the stock was up 92% from its November 15 low.
Investors clearly see recovery potential in Supermicro stock, but if you’re considering buying it, you need to understand the risks the company still faces. Let’s take a look at a few things you need to know.
Investors cheered on Nov. 18 when Supermicro announced it had hired BDO USA as its new auditor, but that could be a bigger risk than investors think as BDO has faced its own regulatory issues.
For example, the company was fined $2 million last year for failing to properly review revenue calculations during a 2018 audit.
An audit quality report from the Public Company Accounting Oversight Board found significant errors in 54% of the 2020 BDO audits it examined, and in 53% in 2021. BDO has also said it has made investments to improve the quality of its improve audits, where they are previous mistakes.
BDO’s own challenges don’t indicate anything nefarious in Supermicro’s hiring, but it could also leave room for doubt if and when Supermicro files its outstanding reports. It also does not affect Ernst & Young’s decision to step down as auditors, and its comment that they were “unwilling to be associated with the financial statements prepared by management”. The fact that Ernst & Young also said it could not rely on management’s statements remains worrying.