SMCI provides business update, will it win over investors?

Super Micro Computer (SMCI) recently reported preliminary earnings for its fiscal first quarter amidst intensifying scrutiny over its financial transparency and management practices. The company, which had already missed an August deadline to file its annual report, is grappling with the fallout from its auditor Ernst & Young (E&Y) resigning, citing governance and transparency concerns. Despite SMCI’s attempts to reassure investors, the company’s failure to provide a timetable for its overdue filing further eroded market confidence, and shares fell approximately 18% in after-hours trading.

In its preliminary results, SMCI reported adjusted earnings per share (EPS) between $0.75 and $0.76, slightly surpassing the consensus of $0.73. However, revenue for the quarter, estimated at $5.9 billion to $6 billion, fell short of analysts' expectations of $6.44 billion. For the upcoming quarter, SMCI forecasted sales between $5.5 billion and $6.1 billion, also below Wall Street’s projection of $6.84 billion. The company attributed its revenue challenges in part to semiconductor availability issues, adding another layer of complexity to its financial struggles.

One of the most pressing concerns is SMCI’s looming Nasdaq compliance deadline. The company has until mid-November to submit a plan to regain compliance with Nasdaq’s listing requirements. If accepted, SMCI could extend its deadline for filing the overdue report to February 2025. During the earnings call, CFO David Weigand emphasized that SMCI intends to “take all necessary steps” to achieve compliance but refrained from providing specific timing on the filing.

Further complicating matters, SMCI’s leadership declined to address questions regarding E&Y’s resignation, which has raised doubts among investors about the accuracy of the company’s reported financials. The independent Special Committee, formed by SMCI’s board and led by outside counsel, reported finding “no evidence of fraud or misconduct by management or the Board of Directors” but noted that it would be recommending measures to strengthen the company’s internal governance and oversight.

SMCI’s relationship with key customer Nvidia, for whom it supplies AI server solutions, was also a topic of concern. CEO Charles Liang mentioned that Nvidia had not made any changes to its supply allocations, indicating that the relationship remains intact. However, the ongoing accounting issues and the lack of clarity surrounding SMCI’s filings could strain this relationship if Nvidia perceives SMCI as a financial risk.

The company's stock has been on a sharp downward trajectory, having fallen more than 75% from its peak earlier this year, fueled by heightened demand for AI hardware. The situation worsened with Hindenburg Research’s report in August, which alleged various financial irregularities and red flags within SMCI. Since E&Y’s resignation last week, SMCI shares have dropped by about 44%, with market sentiment turning increasingly bearish.

Despite SMCI’s assurance that it will work to meet regulatory requirements, the lack of a clear filing timeline has left many investors skeptical. Analysts have voiced concerns about a potential Nasdaq delisting if SMCI fails to meet compliance, which could lead to further share price declines and erode investor confidence. Some analysts, like Needham’s N. Quinn Bolton, suspended their ratings on SMCI, suggesting the latest update did little to restore faith in the company.

Overall, SMCI faces a critical period ahead as it works to restore credibility. The company’s commitment to finding a new auditor and implementing suggested governance improvements will be crucial steps. However, without a clear resolution to the accounting issues, SMCI may continue to face heightened volatility and skepticism in the market.

The company has settled around the $23 level which bears some watching as there are a few signs oif support. Investors would prefer to see some further clarification but, if there is some sellers exhaustion shown, then we could see some bulls slip into the name.