After the crash, is SMCI still a buy?

Following a dramatic 32.68% drop on Wednesday, Supermicro (SMCI) continued its downward spiral on Thursday, declining nearly 12% to a low of $27.22. This recent slide has effectively wiped out the impressive 332% gain the stock achieved earlier this year, highlighting the volatility faced by investors.

Supermicro has maintained a relatively low profile for most of its over thirty-year history. However, the advent of AI, particularly with the launch of ChatGPT in 2022, marked a pivotal turning point for the company. As businesses scrambled to integrate AI capabilities, Supermicro and Dell emerged as key players, assembling NVIDIA chips into customized servers to meet surging demand from tech giants willing to invest heavily in AI infrastructure. This shift led to an influx of investment in Supermicro, which saw its stock rise by 86% in 2022, followed by an astounding 246% increase in 2023. Prior to its recent collapse, the stock had even quadrupled in value.

Despite these gains, Supermicro has encountered significant challenges, particularly regarding its financial reporting. The company's revenues doubled over the past three quarters;     however, a storm of audits precipitated a near 80% decline in its stock price. Ernst & Young (EY), the firm's designated auditing partner, recently resigned, citing concerns about Supermicro's governance and transparency. In a critical 8-K filing submitted this week, EY expressed doubts regarding the company's commitment to ethical accounting practices, indicating that it could no longer rely on management's representations.

EY's resignation has triggered alarm within the investment community, particularly as the firm pointed out that recent information raised significant concerns about the integrity of Supermicro's financial statements. In its resignation letter, EY stated, We determined that we can no longer rely on the representations of management and the audit committee, nor wish to associate ourselves with the financial statements prepared by management. This has led to fears of potential delisting, with Supermicro now required to address these compliance issues urgently.

The Nasdaq Stock Market issued a warning to Supermicro on September 17, indicating that the company must submit its annual report or a plan for regaining compliance within 60 days. This deadline is approaching rapidly, with a cutoff set for mid-November. The threat of delisting looms large, especially considering Supermicro's previous experience with delisting in 2018, when it briefly traded on the OTC market.

Adding to the market's anxiety, Wedbush, a firm known for its bullish stance on tech stocks, has raised concerns about Supermicro's ability to navigate this crisis. The firm noted in its latest report that missing the deadline for submitting the 10-K report could pose significant obstacles for the company as it races against the clock to rectify its compliance status.

Amidst the prevailing negative sentiment, some investors may perceive this turmoil as an opportunity to capitalize on a highly speculative stock. The company announced it would provide a business update for Q1 fiscal 2025 on November 5, which may be crucial for restoring investor confidence. Analysts are optimistic, with Zacks.com projecting quarterly earnings of $0.75 per share, representing a remarkable 120.6% increase year-over-year. Additionally, revenues are expected to hit $6.52 billion, a staggering 207.5% increase compared to the same quarter last year.

On the other hand, while the server market is largely commoditized, Supermicro retains significant competitive advantages, particularly in terms of product customization and energy efficiency compared to its competitors.    There is a noticeable trend among Supermicro's customers toward selecting more premium offerings. For instance, the company anticipates that expensive liquid-cooling systems—previously uncommon before the AI boom—will be installed in 30% of the server racks it ships next year.

Additionally, Supermicro is actively enhancing its production capabilities. A prime example is its new facility in Malaysia, which is set to produce over 5,000 racks of server kits monthly.This expansion positions the company to increase its revenues over the long term.

If the earning projections materialize, investors who seize the opportunity to buy shares at the current low prices could reap substantial rewards in the coming years. However, the uncertainty surrounding Supermicro's governance and audit status suggests that the road ahead may be fraught with volatility, especially within the broader tech market that remains highly sensitive to valuation pressures amid shifting investor sentiment.