The mad dash to adopt artificial intelligence (AI) has catapulted a number of companies into the spotlight, and Super Micro Computer (SMCI -5.22%), commonly called Supermicro, has arguably been one of the biggest beneficiaries. The company is the leading provider of servers specially designed to withstand the rigors of AI, giving Supermicro a pivotal role in the AI revolution.
However, the spotlight can be a cruel mistress, which Supermicro recently experienced firsthand. The company became a victim of its own success, causing a number of self-inflicted injuries that sent the stock plunging as much as 84% from its all-time high, reached earlier this year.
Supermicro announced that it had developed a plan to avoid delisting and had hired a new auditor. The news sent the stock soaring, up more than 30% Tuesday morning (as of this writing).
Let's take a look at the events leading up to today, the company's big announcement, and what it means for investors.
Image source: Getty Images.
An avalanche of bad news
Supermicro was flying high earlier this year, riding the wave of AI adoption that caused a surge in demand for its AI-centric servers, sending the stock up more than 1,000% since the AI revolution kicked off in early 2023. But the celebration was short-lived, and the stock came crashing down. For those who haven't been following along, here's a quick recap of the issues that have plagued the beleaguered company:
- Hindenburg issued a short report that alleged, among other things, that Supermicro's financials contained accounting irregularities, the company had failed to disclose related-party transactions, and had violated U.S. export bans.
- The very next day, Supermicro added fuel to the fire by announcing it would be late filing its annual 10-K report with the Securities and Exchange Commission (SEC), saying it needed additional time to review its internal controls -- or the processes it uses to ensure compliance with accounting rules and regulations.
- Just weeks later, reports emerged that the U.S. Department of Justice (DOJ) was conducting a probe of the company, according to The Wall Street Journal. The investigation appeared to be the result of a whistleblower report that alleged accounting violations.
- Supermicro revealed that it had received a letter of non-compliance from the Nasdaq exchange, which could ultimately lead to delisting.
- Supermicro disclosed that its auditor, Ernst & Young -- one of the world's most respected accounting firms -- had resigned in the midst of the company's audit. The auditors cited issues related to internal controls over Supermicro's financial reporting.
- In another regulatory filing, Supermicro admitted it wouldn't be able to file its most recent quarterly report on time, which again raised the specter of delisting.
Given the extent and magnitude of Supermicro's troubles, it isn't surprising so many investors headed for the exits.
A glimmer of hope
It's always darkest before the dawn, or so the saying goes. This morning, things got a little brighter for Supermicro and its shareholders.
The company announced that it had hired BDO as Supermicro's new accounting firm to complete its audit. This is the all-important first step to restoring legitimacy to Supermicro, though it will take some time for the audit to be completed, as the new firm will be starting from scratch.
Perhaps as important, Supermicro announced that it had submitted a Compliance Plan with the Nasdaq "to support its request for an extension of time to regain compliance with the Nasdaq continued listing requirements."
These two announcements gave investors hope that the worst had passed, and many piled back into the stock.
Not so fast...
While these developments are certainly positive, investors shouldn't get ahead of themselves, as a number of red flags remain. As a Certified Public Accountant (CPA) myself who has worked on a number of audits, I'm still concerned that Supermicro's previous auditor quit mid-audit.
Situations like these usually occur when the auditor has significant concerns about the company's financial practices, when there's a higher-than-normal risk of impropriety due to lax internal controls, or when it can't come to agreement with the company's management about its accounting practices. Furthermore, since the company's original auditor resigned so soon after the short report -- which alleged accounting irregularities -- it increases the likelihood that where there's smoke, there's fire.
Don't get me wrong: I'm rooting for Supermicro to clean up its act so it can focus on the AI market that represents such a compelling opportunity. I'm a shareholder and among those who believe the company has a bright future, so long as it gets its accounting ducks in a row.
However, until I get more clarity on the issues that caused Supermicro's precipitous fall from grace, I won't be buying the stock. And I don't recommend it for your portfolio, either.
