Super Micro Computer’s Stock Plummets: What’s Behind the Chaos?
The artificial intelligence (AI) server maker, Super Micro Computer (NASDAQ: SMCI), has seen its stock tumble dramatically this week, with shares plummeting over 40% since Tuesday. The catalyst for this free fall was the sudden resignation of its accounting firm, Ernst & Young (EY). But what exactly is happening, and what do we know for sure?
A History of Accounting Issues
In 2017, Super Micro delayed its financial reporting and underwent an internal audit, leading to the departure of key executives, including its CFO at the time, Howard Hideshima. The Securities and Exchange Commission (SEC) later charged the company and Hideshima with “widespread accounting violations,” including prematurely reporting revenue and misusing a special marketing program to hide unrelated expenses.
New Allegations Emerge
In August, Hindenburg Research, a short seller, released a report detailing allegations of continued misconduct. The report claims that Super Micro rehired executives involved in the earlier scandal, and that a company owned by the CEO’s brother hired the ousted CFO. Additionally, Hindenburg alleges that the company continued to do business with Russia despite US sanctions and has dubious accounting practices. While these allegations are serious, it’s essential to remember that Hindenburg has a vested interest in Super Micro’s stock declining.
Department of Justice Investigation
Last month, it was reported that the Department of Justice (DOJ) is investigating Super Micro, sending shares tumbling. The probe is in its early stages, and details are scarce. However, the DOJ has begun contacting individuals with relevant information, including a former employee turned whistleblower who filed a lawsuit in April.
Ernst & Young’s Damning Resignation
On Tuesday, October 29, Ernst & Young (EY) announced its resignation as Super Micro’s accounting firm, citing concerns about internal controls and accounting practices. EY stated that it could no longer rely on management’s representations and would be unable to perform its duties in accordance with applicable law or professional obligations. This abrupt resignation is a significant red flag, especially given EY’s incentives are aligned with its client.
A Warning to Investors
While many of the allegations against Super Micro remain unproven, the cumulative effect of these events is concerning. With EY’s resignation, it’s clear that something is amiss. As an investor, it’s wise to exercise caution and steer clear of this stock until further clarity emerges.
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