Friday, 15 November 2024
by BD Banks
Like a frog in a pot of boiling water, things keep getting more uncomfortable for Super Micro Computer (NASDAQ: SMCI) as times goes on.
Supermicro’s growing accounting debacle began in late August as the target of a short report from Hindenburg Research. Just a day later, the company delayed its 10-K filing. In September, the Department of Justice launched an investigation into the company over accounting issues, according to The Wall Street Journal, and last month, Ernst & Young resigned as the company’s auditor, a glaring red flag.
Since then, the company reported preliminary fiscal 2025 first-quarter results but offered little clarity on the status of its 10-K filing and other challenges. Unsurprisingly, the company just filed to delay its 10-Q report as well.
Consequently, the stock has declined 65% since Hindenburg published its report.
Investors anxious to see where Supermicro is headed next may not have to wait very long as these issues could come to a head next week. There are two major reasons why.
Image source: Getty Images.
Supermicro received notice from Nasdaq on Sept. 17 that it was not in compliance with the exchange’s rules that require timely filing of reports with the Securities and Exchange Commission (SEC). According to that notice, Super Micro Computer has 60 days to file its 10-K or submit a plan to Nasdaq to regain compliance. That period expires on Nov. 16, which means the delisting procedure could begin as soon as Monday, Nov. 18. That would mean the stock would trade over the counter (OTC) and lose its place in the S&P 500, as well as the wide range of exchange-traded funds (ETFs) that hold the stock.
Currently, it’s unclear how the company plans to handle the delisting notice as it doesn’t seem to be on the verge of filing its 10-K statement, especially since it still doesn’t have an auditor. In the preliminary first-quarter earnings report from Nov. 5, management said it intends to take the necessary steps to get back into compliance with Nasdaq as soon as possible. Since it seems unlikely the company will file its 10-K in the next few days, investors should expect it to deliver a plan to regain compliance, though it’s unclear what that would include.
Supermicro also shared an update from its recently formed Independent Special Committee on Nov. 5, which said the Audit Committee acted independently of any influence from CEO Charles Liang, and there was no evidence of fraud or misconduct by management or the board of directors.
The Independent Special Committee is also recommending a set of remedial measures, and it said the full report would be ready by the end of this week.
Supermicro is clearly under pressure, and the company could face fines from the SEC or DOJ, not to mention potential financial restatements that would further devastate the stock. However, the biggest risk to Super Micro Computer’s business seems to be the loss of its close relationship with Nvidia (NASDAQ: NVDA), its most important partner.
Nvidia is already distancing itself from Supermicro, according to reports that say the artificial intelligence (AI) chip giant is redirecting orders from Supermicro to other server companies. Nvidia hasn’t confirmed those reports, but assuming they’re accurate, that move is likely due to fears of reputational risk from being tied to Super Micro Computer. Nvidia may also want to avoid any operational problems at Supermicro as the former launches its newest Blackwell chips.
Investors will get an update from Nvidia on Wednesday, Nov. 20 when the company reports its fiscal third-quarter earnings. The earnings call could shed some much-needed light on the Supermicro situation.
Super Micro Computer is running out of time to address its various problems, and the stock seems to be at a pivotal moment. Investors could find out as soon as next week just how viable its future is.
If it fails to submit a plan to the Nasdaq to stay in compliance, and Nvidia indicates in its earnings report that Supermicro’s problems are more intractable than understood, the stock could enter a downward spiral that will be hard to reverse.
That said, it’s also possible the company will recover as well, but the momentum and facts on the ground seem to be pushing in the opposite direction. At this point, the stock is too risky, but it’s worth paying attention to what happens to Supermicro in the coming weeks. If the company can stay in compliance with the Nasdaq, reassure investors with the findings from its special committee, and clear Nvidia’s earnings report without bad news, there could be daylight for the stock.
Even so, it will not be easy for the company to clear its record and earn back investor trust.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.