The shares of Super Micro Computer (SMCI) can't seem to catch a break lately. Following a scathing report by short seller Hindenburg Research in late August, the company delayed the filing of its 10-K report for fiscal year 2024, and now risks being delisted from the Nasdaq for the second time in six years after its auditor, Ernst & Young, resigned. The “Big 4” auditor said it was “unwilling to be associated with the financial statements prepared by management.”

The fallout has been severe, with SMCI stock nosediving following the resignation of its auditor, and now erasing all its gains for the year. Even more troubling, reports today indicate that key client Nvidia (NVDA) is now redirecting orders to rival artificial intelligence (AI) server companies in order to avoid potential supply disruptions stemming from Super Micro's issues.

Overall, SMCI stock is down 13.6% on a YTD basis. Long-term shareholders are still doing well, with SMCI up 1,125% over the past five years - but the stakes are incredibly high ahead of tomorrow night's quarterly earnings report from Super Micro, where investors and analysts alike will want to hear a substantive update on the company's spiraling accounting issues.

With the situation looking incredibly dire for Super Micro Computer stock ahead of its Tuesday night earnings release and the Nov. 16 deadline to regain compliance with Nasdaq listing standards, should investors consider scooping up this beaten-down stock at a bargain - or steer clear? Here's a look.

The Good

Growing Market: Founded in 1993, Super Micro Computer (SMCI) designs, develops, manufactures and markets high-performance, high-efficiency server and storage technology for various applications in the data center, cloud, enterprise IT, scientific computing, and embedded markets. Notably, the San Jose-based company is one of the largest producers of high-performance and high-efficiency servers.

The market is projected to grow rapidly in the coming years, which bodes well for companies like SMCI. According to industry forecasts, the AI server market is forecast to reach a market size of $177.4 billion by 2032, clocking a CAGR of 18% between 2024 and 2032. Further, IDC stats suggest that data center storage capacity is expected to grow at a CAGR of 18.5% from 10.1 zettabytes (ZB) in 2023 to 21.0 ZB in 2027, fueled largely by AI.

Competitive Advantage: Super Micro's edge is its ability to tailor server solutions to diverse customer requirements, a notable competitive edge in an industry where customization under time constraints is complex and a barrier to entry. The company achieves this through a modular design approach, assembling pre-configured, compatible components to create bespoke server configurations efficiently. This method allows for quick turnaround from order placement to product delivery, ensuring responsiveness to client demands.

Super Micro rallied in early October after announcing that it was shipping over 100,000 GPUs (graphics processing units) per quarter, and has delivered over 2,000 liquid-cooled racks since June 2024.

Sustainability is also integral to Super Micro's strategy, positioning it as a forward-thinking leader in green computing. The company was among the pioneers of liquid cooling for servers, a technology that conserves energy and minimizes the physical space required compared to traditional air-cooled systems. This innovation translates to reduced capital expenditures for data center operators, particularly those owning their facilities, due to the lower real estate footprint needed for liquid-cooled systems.

Bargain Priced: Super Micro says it doesn't expect to restate its earnings for the 2024 fiscal year ended in June, and despite a bottom-line miss in its most recent fiscal Q4 earnings report in August, the results showed strong year-over-year growth. SMCI reported adjusted earnings of $6.25, which missed expectations of $8.14 per share, while revenue more than doubled to $5.31 billion, surpassing estimates.

Given the stock's significant underperformance since the Q4 report, SMCI is now priced at a steep discount. The shares trade at 7.79x forward adjusted earnings and 0.55x forward sales, which is remarkably cheap for an AI growth stock - though, in light of the major uncertainties surrounding Super Micro stock right now, it's fair to say that SMCI is cheap for a reason.

The Bad

The DOJ is Interested: Super Micro’s recent challenges have raised significant concerns about its governance and financial transparency, highlighted by the abrupt departure of auditor Ernst & Young, and the stakes have been raised by reports that the U.S. Department of Justice is scrutinizing the company’s accounting practices.

In particular focus are concerns regarding potential conflicts of interest and related party transactions. Super Micro disclosed significant dealings with suppliers Ablecom and Compuware, which are controlled by CEO Charles Liang’s brothers. Over the past three years, these transactions totaled nearly $983 million. Additionally, Charles Liang and his wife have ownership stakes in Ablecom. Trade records indicate that nearly all of Ablecom's and Compuware's exports to the U.S. were to Super Micro, raising questions about the independence and fairness of these business relationships.

The company’s history of management turnover and regulatory scrutiny adds further complexity. Former CFO Howard Hideshima departed in January 2018 amid SEC charges related to accounting violations, and was subsequently hired by a related party owned by Liang's brother. Super Micro did hire a new CFO in 2018, who was well-regarded for his integrity and helped guide the company through a re-listing on the Nasdaq; however, his resignation in early 2021, coupled with allegations from a former sales director that he was pushed out, suggests a potential pattern of management instability.

Increased Competition: Super Micro's recent regulatory and governance challenges have positioned its competitors to potentially seize market share. Dell Technologies (DELL), which has already been outperforming Super Micro since early 2024, stands as a prime contender, as does Hewlett Packard Enterprise (HPE), which is similarly well-positioned to benefit from any realignment in customer trust and interest, particularly in the AI server and data center solutions space. 

The competitive landscape in AI rack server solutions is marked by rapid technological advancements where being first to market confers a distinct advantage. With Super Micro contending with regulatory scrutiny, delays, and questions surrounding its governance, customers could become cautious, considering alternatives that offer stability and strong reputations. 

Notably, today's reports highlighting Nvidia's shift away from Super Micro named Taiwan-based Gigabyte and ASRock as likely beneficiaries of the AI chip giant's order flow.

Delisting Threat: Super Micro said late Friday that it amended its loan agreement with Cathay Bank to allow until the end of the year to file its annual results, but the company only has until Nov. 16 to present a plan to Nasdaq to regain compliance with listing standards. Getting delisted would be a major blow for the shares, and likely result in substantial additional losses as institutional holders dump their SMCI stock.

When Super Micro reports earnings on Tuesday night, Wall Street will be looking for adjusted EPS of $0.73 on revenue of $6.44 billion. However, management's updates on their plans to regain Nasdaq compliance and address accounting issues will likely be a more immediate driver of SMCI's stock price in the aftermath of the report.

What Do Analysts Say About Super Micro Computer Stock?

Super Micro stock is now a “Hold” on Wall Street, down from “Moderate Buy” a month ago.

“We see higher delisting risk in the absence of an auditor and the potential challenge to getting a new one,” analysts at Mizuho wrote in a note last week, while Rosenblatt withdrew coverage altogether.

Out of 12 analysts in coverage, only 3 still rate SMCI a “Buy” or better. 

For investors considering a bargain play on this beaten-down stock, it's definitely cheap right now - but considering the heightened risk and significant uncertainty surrounding SMCI right now, there's no rush to buy this one ahead of key updates from management.

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