Shares of Super Micro Computer Dip Once More Following New Developments. Has the Downturn Ended, or Are Further Declines Likely for the Equity?
Shares of Super Micro Computer (SMCI 1.12%) continued to decrease in value following the company's announcement of its fiscal first-quarter results and audit status. In the beginning of 2024, Supermicro saw a significant increase in value, with its stock rising four times its original value within the first three months. However, its stock has been in the negatives for the year after this recent drop.
Let's delve deeper into Supermicro's latest developments and provide guidance on what investors should do with the stock.
Revenue significantly lower than anticipated
In a statement to investors, Supermicro revised its forecast for fiscal Q1 sales, predicting a range between $5.9 billion to $6.0 billion. Previously, the company anticipated revenue to be between $6 billion and $7 billion. Although below expectations, it's worth noting that the company's revenue in the previous year was $2.1 billion. Even with the reduced forecast, revenue is still projected to almost triple compared to the previous year.
Supermicro now expects its adjusted earnings per share (EPS) to fall within a range of $0.75 to $0.76, a decrease from its earlier prediction of $0.67 to $0.83. This is an increase from $0.34 per share in the previous year, when adjusted for the company's early 10-for-1 stock split.
Gross margins, which were a concern for the company in the last quarter when they dropped to 11.2% from 15.5% in the fiscal third quarter and 17% the year prior, are anticipated to be around 13.3%. This is a sequential improvement that brings it closer to its typical 15% to 17% range. It's important to note that this is a low-margin business, with companies like Nvidia and Broadcom boasting gross margins closer to 75%.
Looking ahead to qualifying for its second fiscal quarter, Supermicro forecasts revenue between $5.5 billion to $6.1 billion, and adjusted EPS between $0.56 to $0.65. In the previous fiscal quarter, the company recorded revenue of $3.66 billion and an adjusted EPS of $0.56 split-adjusted.
As for its accounting, Supermicro revealed that its Special Committee did not find any evidence of fraudulent activities by management. However, the company will implement various measures to improve its internal governance and supervision functions. Supermicro, however, is unable to determine when it will file its 10-K annual report, which was due on Aug. 29.
The inability to file its annual report exposes Supermicro to the risk of being de-listed by Nasdaq. The exchange sent a letter of non-compliance on Sept. 17, and Supermicro has 60 days to file or submit a plan to regain compliance. At this time, it appears that the stock is at risk of being de-listed, given that the company does not even have an auditor after Ernst and Young resigned.
Supermicro faced de-listing in 2019 due to accounting issues before being re-listed in 2020. In the event of another de-listing, the stock would trade on the OTC market. Additionally, the stock being de-listed may also lead to its removal from the S&P 500, which it recently joined.
What to do with Supermicro's stock?
Although Supermicro has seen significant growth from the AI infrastructure boom, a variety of concerns surrounding its accounting arise. This includes the resignation of its auditor and prior findings of channel stuffing by the SEC.
Excluding the potential accounting issues, the primary risk to the company is the impact of these concerns on its customer relationships. Despite the benefits from the AI infrastructure expansion, Supermicro operates in a low-margin industry with numerous competitors.
According to a report from DigiTimes Asia, Nvidia has taken steps to redirect orders away from Supermicro due to the uncertainty surrounding the company. If suppliers and customers decrease their business dealings with Supermicro, it may have a more significant impact in the long term than a fine from the government.
While some investors may find appealing to invest in the heavily discounted stock, I believe it is best to remain on the sidelines due to the numerous uncertainties and potential risks surrounding the stock. There are better ways to capitalize on the AI infrastructure expansion.
Investors considering Supermicro's stock might want to reconsider their decisions due to the company's accounting issues, including the resignation of its auditor and past findings of channel stuffing by the SEC. These concerns could negatively impact Supermicro's customer relationships in the highly competitive low-margin tech industry. Instead, it could be wiser to seek other opportunities to capitalize on the AI infrastructure expansion with less uncertainty.
Given Supermicro's current financial situation and regulatory challenges, it might be an opportune time for potential investors to think strategically about their money in the finance world. Although short-term gains may appear attractive, it would be prudent to allocate resources towards more stable and promising investment opportunities in this rapidly evolving tech landscape.
