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Super Micro Computer (SMCI) got off to an incredible start this year as shares more than quadrupled from January to mid-March. The increase made Super Micro eligible for inclusion in the S&P 500, with the technology hardware stocks (with links to AI) being added to the index on March 18, 2024. In retrospect, that would have been a good time to take profits or short the stock. , as shares have fallen more than 50% since then.
One of the most significant developments was the Hindenburg Research report, which contained worrying allegations about the company’s financial reporting. In assessing these allegations, along with Super Micro’s fundamentals, I have a neutral rating on the stock.
Hindenburg has doubts about Super Micro
The Hindenburg report is actually the main reason I’m neutral rather than bullish on SMCI stock, and I think it has caused hesitation among many AI stock analysts and investors.
The accusations are quite simple. According to Hindenburg, Super Micro engaged in accounting manipulation, including “sibling self-dealing and sanctions evasion.” Anyone who thinks this sounds far-fetched may want to recall that the SEC sued Super Micro in August 2020 for widespread accounting violations. Hindenburg’s report also argued that most of the people involved in those accounting malpractices are back on Super Micro’s team.
Hindenburg’s team interviewed several Super Micro salespeople and employees in preparing their report. It doesn’t help that Super Micro delayed its 10-K filing to review its internal controls shortly after Hindenburg went public with his concerns. While this may just be a coincidence, the timing is concerning. Looking back several years, Super Micro failed to file its financial statements in 2018 and was, as a result, briefly delisted from the Nasdaq.
Early this month, Super Micro publicly denied the allegations, with CEO Charles Liang hitting back and stating that Hindenburg’s report contained “misleading presentations of information.” Super Micro has not made any additional statements since.
The growth of artificial intelligence is undeniable
Super Micro’s status as part of the rapidly changing world of AI is one of the few reasons I’m neutral rather than bearish on SMCI stock. The exciting prospects for the company’s business and the seriousness of Hindenburg’s allegations effectively offset each other.
It’s hard to know what’s real and what’s not, but most people admit that the AI industry as a whole offers attractive growth prospects. Nvidia (NVDA) has been posting triple-digit annualized revenue growth for several quarters. Other tech giants have integrated artificial intelligence into their core businesses and delivered impressive results for their shareholders. For example, Alphabet (GOOGL) saw its cloud revenues rise 28.8% year over year as many companies rushed to create their own AI tools.
According to Precedence Research, the artificial intelligence industry is expected to maintain a compound annual growth rate of 19.3% from now until 2034. The AI industry should continue to grow, and that should give Super Micro a boost. The company should benefit from Nvidia’s growth. That’s why the company achieved exceptional revenue and net profit growth during Nvidia’s rise. That’s what we’ve seen for several quarters. We just don’t know how accurate all the numbers were, if the allegations against the company are substantiated.
Super Micro has strong financials at face value
While it’s impossible to overlook Hindenburg’s allegations against Super Micro, it’s still worth assessing the company’s previous quarterly results. Stocks were already falling before Hindenburg published his report. While I argued in March 2024 that SMCI stock posed risks, I felt that shares presented a huge buying opportunity in the late summer until Hindenburg clouded that optimism.
For the last reported quarter, Super Micro posted net sales of $5.31 billion, up 143% year over year. Meanwhile, net income rose 82% year-over-year to reach $353 million. At the time of publication, my primary concern was Super Micro’s declining net profit margin. Super Micro currently trades at a 20x forward price-to-earnings ratio, seemingly enough to offset any further erosion in profit margins. SMCI stock has a ridiculously low price-to-earnings ratio of 13.6x, but with the recent rate hikes (the Hindenburg report and the DOJ investigation), investors seem reluctant to bid the valuation multiple any higher at this point.
We do not yet have any tangible evidence that Super Micro has engaged in misconduct as alleged by Hindenburg. However, their report has certainly cast a black eye on the stock. I expect Super Micro would have significantly outperformed its fiscal 2023 results even if there were no mistransactions.
The Department of Justice is investigating supermicrocomputers
The Super Micro controversy added a new chapter on September 26, when news spread that the US Department of Justice is now investigating the company. SMCI shares tumbled another 12% on this news, with shares recently trading at less than a third of their all-time high in March. There is currently a high risk/return on the shares, but the increased risks have left me on the sidelines with a neutral rating.
Super Micro shares bounced back more than 4% on Friday, September 27, indicating that many investors believe the long-term potential for the company is worth the increased uncertainty.
Is Super Micro Stock worth a purchase?
While ratings for this stock can change quickly, Super Micro currently has 2 Buy ratings, 10 Hold ratings, and 1 Sell rating from the 13 analysts covering the stock. The average price target for SMCI is $613.92, implying a potential upside of almost 50%. Then again, it’s entirely possible that several research brokers have revised their SMCI ratings. SMCI stock has a few low price targets, including $454, $375, and $325 from CFRA, Wells Fargo (WFC), and Susquehanna, respectively. All of these price targets were set before the DOJ investigation was announced, so even these could fall lower.
The performance of SMCI stock
There’s an old saying that goes, “You die a hero, or you live long enough to be the bad guy.” That quote seems appropriate for this company. Super Micro earned big profits for many investors during its rise above its stock price of $1,000 per share. Those who came late to the story, even after SMCI stock was added to the S&P 500, have not fared well. Many investors are currently experiencing significant losses. Depending on what those investors do, it’s hard to say how much more downside Super Micro stock could have until its trials and tribulations become clearer.
If the company’s recent financials are correct, SMCI stock looks quite attractive here. Stock prices could rise quickly if the Hindenburg report loses relevance, although that outcome is difficult to predict. I’m a big fan of Super Micro’s industrial and business potential regarding AI, which keeps me from being outright bearish. I have a neutral position here. In the meantime, I don’t expect SMCI’s shares to rise above $460 (the estimated price prior to news of the DOJ investigation) without some resolution to the two main threats to shareholder value.
Revelation