SMCI Business Update: Can it regain investors trust?
AInvestTuesday, Nov 5, 2024 2:59 pm ET
2min read
SMCI --

Super Micro Computer (SMCI) is set to report its Q1 fiscal 2025 business update today, November 5, amid heightened scrutiny surrounding its accounting practices and internal controls. Analysts are forecasting revenue of $6.44 billion for the September quarter, reflecting an impressive 204% year-over-year growth, with an EPS expectation of $0.73. For the current quarter ending in December, Wall Street projects revenue of $6.84 billion and EPS of $0.81. However, these results are overshadowed by recent controversies that could affect investor confidence.

One major issue facing Super Micro is the recent resignation of its auditor, Ernst & Young (EY), which has significantly eroded trust in the company’s financial reporting. EY cited concerns about governance, transparency, and completeness of communication with the management and audit committee as reasons for their departure, stating that they could “no longer rely” on SMCI’s representations. This resignation has intensified worries, especially given that Super Micro had already switched auditors last year.

The Hindenburg Research short-seller report from August added to the pressure, highlighting potential red flags in SMCI’s accounting practices. Hindenburg accused SMCI of irregularities, including undisclosed related-party transactions, which led to increased scrutiny from the U.S. Department of Justice. Following the report, Super Micro delayed filing its 10-K report, amplifying concerns about its financial transparency.

Super Micro’s stock price has seen substantial volatility this year, initially rallying strongly with a 317.9% gain after being included in the S&P Dow Jones Indices in March. However, amid these recent developments, SMCI shares have dropped nearly 80% from their highs, with three consecutive days of losses last week alone. Investors’ apprehension surrounding the company's accounting issues has fueled this steep decline, with the potential for further downside if clarity is not provided soon.

The absence of a full earnings report tonight further complicates matters, as the company plans only to release a business update instead of a complete financial statement. Without additional financial transparency, many investors and analysts may remain cautious. Susquehanna recently suggested steps to restore confidence, including hiring a reputable new auditor, restructuring the board of directors for greater independence, and potentially appointing an external COO to bolster oversight.

As a critical player in AI infrastructure, SMCI’s success is tied closely to NVIDIA, its third-largest customer. SMCI’s AI servers, especially the high-demand NVL72 Blackwell rack systems, are essential for NVIDIA’s operations. If SMCI faces funding issues due to its negative working capital and strained cash flows, it could impact NVIDIA’s supply chain, as SMCI relies heavily on cash flow to sustain its operations.

Looking ahead, the company's guidance will be closely scrutinized. Analysts are concerned that margin pressures and internal control issues may limit SMCI’s ability to meet expectations, and Susquehanna has expressed doubts about the company’s forecasted EPS for both the September and December quarters. If SMCI does not address the underlying concerns adequately, it risks further erosion in market confidence.

In light of SMCI’s current turmoil, the stock’s potential for further volatility remains high, with short interest likely to rise. The uncertainty surrounding the company’s accounting practices and lack of transparency has led analysts, including those at Wells Fargo and Needham, to suspend coverage, further illustrating the challenging environment facing SMCI as it attempts to navigate its current crisis.

SMCI’s stock has recently found some support around the $25 level as investors await clarity in its upcoming business update. The company has so far done a poor job of addressing the specific accounting concerns, making it essential for this update to provide a detailed financial statement that directly confronts these issues. A leadership change at the executive level could help improve sentiment, signaling a commitment to restoring credibility. However, re-establishing trust in SMCI’s operations is a significant challenge, and the path to achieving it remains uncertain. Given the heightened volatility surrounding the stock, traders should approach SMCI cautiously. A follow-up will be provided tomorrow to assess whether the company was able to meaningfully address investor concerns and move toward rebuilding market confidence.

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