With shares down by 78% from an all-time high reached in March, Super Micro Computer (NASDAQ: SMCI) might be one of the first dominoes to fall as the artificial intelligence (AI) hype cycle reaches a possible conclusion. But so far, this crash has little to do with company fundamentals and seems more related to allegedly shady accounting practices and possible wrongdoing.

Let’s explore three factors to watch before considering a position in this embattled tech stock.

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The first recent sign of trouble for Supermicro came in late August when short-seller Hindenburg Research — which would financially benefit from a fall in the stock’s price — released a report alleging the company engaged in accounting manipulation, self-dealing, and evading sanctions related to Russia’s invasion of Ukraine. Last week, some of these accusations gained strength when when Supermicro’s auditor, Ernst & Young, resigned, saying, according to Supermicro that “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 and to be unwilling to be associated with the financial statements prepared by management…”

To make matters worse, Supermicro is also reportedly being looked at by the Justice Department, which is said to be reaching out to the company’s former employees and others.

These developments won’t necessarily affect Supermicro’s operations. However, they could tank its valuation by creating skepticism about the accuracy of its reporting and potential fines that could come up if management is found guilty of wrongdoing. Unfortunately, that might be the best-case scenario for this increasingly embattled company.

Supermicro’s situation could get much worse. Public companies are required to have auditors and to file their financial statements by certain deadlines. The company has fallen out of compliance with both requirements, putting it at risk of delisting by te Nasdaq.

After failing to file its annual 10-K annual report in August, management has until mid-November to submit a compliance plan, which (if approved) could push the deadline to February 2025. However, Supermicro is still in a catch-22 because it doesn’t have an auditor, and the ongoing issues could make new firms hesitant to take on the role.

Wedbush analyst Matt Bryson highlighted the difficult situation in an interview with Bloomberg: “I think that they probably end up getting delisted just because of the timelines involved. How do they get their 10-K out in just a few months when they don’t have an auditor, and their last auditor resigned?”

Nervous person looking at a computer screen
Image source: Getty Images.

If Supermicro is delisted, shares would probably move to over-the-counter markets, which can be less liquid than traditional exchanges. However, this doesn’t have to be permanent because companies can regain compliance and relist. For instance, the stock was delisted after failing to meet Nasdaq reporting deadlines in 2019 before rejoining the exchange in 2020.

Most of Supermicro’s biggest near-term challenges could hurt its valuation, not its fundamentals, and earlier this week it released some encouraging, though preliminary, news. On Nov. 5, it released an update from its “independent special committee” suggesting fiscal first-quarter (the quarter ended Sept. 30) net sales of $5.9 billion to $6 billion.

These figures are much lower than management’s previous guidance of $6 billion to $7 billion, but they represent 180% growth compared to the $2.12 billion reported in the prior-year period. With a forward price-to-earnings ratio of 7.65, Super Micro Computer’s stock is starting to look like a great deal, but until there’s more clarity, it might not be worth considering this speculative play.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Is Super Micro Computer Stock a Buy? 3 Things to Watch. was originally published by The Motley Fool

Source: finance.yahoo.com