Pondering Over Investing in Super Micro Computer Stock After Its Staggering 1,480% Increase Over Five Years? Wall Street Offers a Direct Response for Potential Investors.
Super Micro Computing (SMCI) shareholders have been on a rollercoaster ride lately. Despite a 1,480% surge in the last two years, the stock has plummeted over 70% from its all-time high in the previous eight months. As a major partner of Nvidia, the server manufacturer should benefit from the rising demand for artificial intelligence (AI) infrastructure, but Supermicro has also been implicated in accounting manipulations.
Out of the 12 analysts monitoring the company, the median 12-month price forecast of $30.50 per share suggests a 8% decrease from the current share price of $33. This means that six analysts anticipate a drop greater than 8% within the next year. Furthermore, 19 analysts had been tracking Supermicro three months ago, indicating that seven have recently stopped coverage. Wall Street seems to be distancing itself from the company.
Here are the key factors to consider.
The upside: Supermicro is a leading AI server supplier
Super Micro Computer constructs servers, including fully integrated server racks equipped with storage and networking, offering clients a complete solution for data center infrastructure. Its in-house manufacturing abilities and "block-by-block" product development approach allow it to introduce new technologies to the market faster than its competitors, often by two to six months.
As a matter of fact, Rosenblatt analyst Hans Mosesmann stated earlier this year, "Super Micro has developed a strategy that is extremely quick to market. They usually have the broadest product portfolio when a new product is launched." These advantages have contributed to Supermicro's position as a leader in AI servers, a market projected to grow at an annual rate of 30% through 2033, according to Statista.
Importantly, Supermicro is also the primary supplier of direct liquid cooling (DLC) systems, which could strengthen its position in AI servers. DLC systems decrease data center power consumption by 40% and take up 80% less space compared to traditional air-cooled systems. Given that AI servers generate more heat than conventional servers, the demand for DLC systems is projected to surge rapidly.
In fact, while less than 1% of data centers traditionally used liquid cooling, Supermicro estimates that between 15% and 30% of new data center installations will use liquid cooling within the next two years, and the company asserts that it is well-positioned to capture the majority of this growth.
The downside: Supermicro faces numerous issues
As previously mentioned, while Supermicro shares have risen 1,480% in the last two years, the stock has also plummeted more than 70% from its all-time high in the previous eight months. Below is a month-by-month account of the events that led to this dramatic decline in value.
- August 2024: Short-seller Hindenburg Research released a report accusing Supermicro of accounting infractions, including ineffective revenue recognition, hidden related-party transactions, and sanctions evasion. Subsequently, Supermicro delayed filing its Form 10-K for fiscal 2024, but CEO Charles Liang stated that the Hindenburg report contained "false or inaccurate statements."
- September 2024:The Wall Street Journal reported that Supermicro was under investigation by the Justice Department, following a former employee's lawsuit accusing the company of accounting anomalies, some of which were mentioned in the Hindenburg report. Supermicro also received a letter of noncompliance from the Nasdaq Exchange, granting it 60 days to file its 10-K or submit a reinstatement plan.
- October 2024: Supermicro's auditor, Ernst & Young, resigned. "We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management's and the Audit Committee's representations," the company wrote in its resignation letter. Ernst & Young also stated it was "unwilling to be associated with the financial statements prepared by management."
- November 2024: Supermicro delayed filing its Form 10-Q for the first quarter of fiscal 2025. Nonetheless, the company hired BDO as its new auditor and submitted a compliance plan to Nasdaq ahead of the deadline, committing to catching up on its filings in a timely manner. Now, the Nasdaq must either approve or reject the plan.
The situation is more complex than described above, as Supermicro was accused of similar accounting infractions in the past. At that time, the company filed its Form 10-K for fiscal 2017 nearly two years late and was fined $17.5 million by the Securities and Exchange Commission (SEC). Supermicro was also delisted from the Nasdaq Exchange for approximately 18 months, but its shares still rose by 73% during that period.
Given Supermicro's strong position in the AI server market, which is projected to grow at an annual rate of 30% through 2033, investing in their finance could yield significant returns in the long term. However, the company has faced numerous issues, including accounting manipulations, regulatory investigations, and auditor resignations, which have negatively impacted its stock price. Managing the risk associated with these problems would be crucial for any potential investor.
