Super Micro Computer’s Turbulent Ride: Can It Recover?
The once-high-flying Super Micro Computer (NASDAQ: SMCI) has seen its shares plummet by 49% in just 30 days. The company’s auditor, Ernst & Young, has abandoned ship, citing concerns over Super Micro’s financial statements. This development comes on the heels of a scathing report by Hindenberg Research, which accused the company’s management of accounting irregularities, self-dealing, and sanctions evasion related to Russia.
A History of Questionable Practices
Super Micro’s checkered past is a cause for concern. In 2018, the company was temporarily delisted from the Nasdaq exchange due to its failure to file financial reports on time. Although it regained compliance in 2020, it was slapped with charges of “widespread accounting violations” related to premature revenue recognition and expense understatement. The company settled for $17.5 million and its CEO, Charles Liang, had to reimburse $2.1 million in stock profits. These prior violations may provide insight into the internal control failures Super Micro may still be grappling with.
Leadership Quality in Question
The fact that Super Micro continues to face accounting-related allegations raises concerns about its leadership quality. Hindenburg’s report claims that three senior employees who left during the 2018 scandal were rehired, and former employees believe the company’s business culture hasn’t improved since then. While managerial skills are difficult to quantify, they ultimately impact business performance.
Fines, Delisting, and Valuation Concerns
Super Micro faces the threat of more fines and possible delisting, which could hurt its valuation. The company has already missed the deadline for its 10-K annual report and plans to file for an extension. However, finding a new auditor willing to associate with its financial statements may prove challenging, especially with an active Justice Department investigation. If delisted, Super Micro will likely move to the less liquid over-the-counter markets, which could dramatically impact its valuation.
Financial Headwinds Ahead
Super Micro may also face financial headwinds. Holders of its $1.725 billion convertible notes can demand early repayment if the company is delisted. With only $2.1 billion on its balance sheet as of September, such an outflow would put pressure on near-term liquidity. While Super Micro can tap capital markets for more cash, this will come at a high cost to investors.
A Glimmer of Hope?
On November 5, Super Micro announced an update related to its first-quarter results, with revenue expected to grow 180% year over year to between $5.9 billion and $6 billion. If accurate, this makes the stock relatively cheap, with a forward price-to-earnings ratio of just 7.5. However, these results are unaudited and may be influenced by poor internal controls.
Investor Caution Advised
While Super Micro looks like a great deal, investors may want to wait for more information before considering a position. The company’s turbulent ride is far from over, and caution is advised until its leadership and financial practices are sorted out.
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