Super microcomputer (NASDAQ: SMCI) is one of the most polarizing stocks we own this year. It started as a popular artificial intelligence (AI) company with huge potential, but has recently become a risky investment with questionable and possibly inflated numbers due to poor accounting controls and procedures.
Some investors believe the company has dropped concerns about its operations after an independent special governance committee recently reviewed its operations and found no evidence of any wrongdoing by management or the board of directors. The stock is on the rise again, but is still down more than 60% from its 52-week high of $122.90.
If the company proves its doubters wrong, Supermicro could be destined for even bigger gains in the coming weeks and months. Could there be a huge rally in 2025?
There have been three major issues that appear to have weighed on Supermicro’s valuation this year:
-
The company gross margins are shrinking. This is a significant problem because without strong margins, the prospects for growing its bottom line deteriorate, and that could make the stock a much worse buy.
-
Hindenburg Research, a notable short seller, released a report in August alleging that Supermicro was involved in accounting manipulation and actually inflated its numbers.
-
The company’s auditor, Ernst & Young, resigned in October, raising concerns about its internal controls and exacerbating concerns about the reliability of its financials. The company is also late in reporting its quarterly and annual returns.
Reflecting these concerns, technology stocks have fallen in recent months. But with the company recently announcing that it had found a new auditor in BDO and that a special committee had found no evidence of wrongdoing, investors appear to be more bullish on the stock lately as it has risen in recent weeks.
If Supermicro wants to alleviate concerns around its business, the company needs to deliver solid, audited financials, at least for the most part. If it can do that, it should succeed in winning back many investors who may worry it’s too risky.
The company has been granted an extension of Nasdaq to submit its financials by February 25. If the new auditor approves the annual results and the numbers look good and margins improve, that could be what the stock needs to regain investor confidence.
Until that happens, however, there will be significant risk and uncertainty surrounding the stock. In its most recently completed filings, which covered the period ending June 30, Supermicro reported revenues of $5.3 billion, up 143% year-on-year, as demand for its IT infrastructure, including cloud and server solutions , was incredibly strong.