Super Micro Computer’s stock (SMCI) has been at the center of controversy in recent months due to accounting fraud allegations from a short-selling firm, which caused its stock to plunge. While the long-awaited verdict on the case came out in Super Micro’s favor, leading to a rebound in the stock, there are still concerns connected to its growth story that prompt me to maintain a neutral stance for now.
Although the stock’s valuations remain attractive, even after the recent rebound, this article will outline why caution is still warranted in the short to medium term.
To provide some context for why I had a Hold rating on Super Micro Computer (SMCI) stock, the company had recently come under scrutiny due to a report published by Hindenburg Research, a well-known short-selling firm that also held short positions in SMCI. In the report, Hindenburg accused Super Micro of accounting manipulations, among other concerns. The key allegations centered around Super Micro allegedly selling its products to businesses that were already connected to the firm in some way.
This raised doubts about the authenticity of Super Micro’s reported sales and earnings, suggesting that demand might not have been organic. As a result, questions were raised about the need for a closer examination of the company’s balance sheet. These accusations gained traction, partly due to the fact that Super Micro had faced similar issues in the past. In August 2020, the company settled with the SEC for $17.5 million over widespread accounting violations.
Notably, some senior executives involved in that scandal were later rehired, which fueled concerns about the company’s internal controls and governance. As a result of the latest allegations, SMCI shareholders suffered significant losses following the release of the Hindenburg report. Despite a strong performance earlier in the year—with shares up 75% before the report—Super Micro’s stock plummeted by more than 60% over a two-week period.
Although skepticism about the fraud allegations had already begun to dissipate, with shares rebounding more than 80% between the lows of November 15, the final verdict came on December 2, delivering a positive outcome for Super Micro Computer investors. The special committee overseeing the investigation found no evidence of misconduct by management or the board of directors.
It’s important to note, however, that the special committee was part of the Super Micro board, meaning it wasn’t an entirely independent body. As a result, no restatement of the company’s reported financials is required. This news sent SMCI shares soaring, increasing by more than 31% following the announcement. The committee’s key statement read, “The evidence reviewed by the special committee did not raise any substantial concerns about the integrity of Super Micro’s senior management or audit committee.”
However, it’s worth noting that the use of the word “substantial” implies there were some findings in specific processes, even if they were not deemed significant. In response, Super Micro has committed to implementing the recommendations of the investigation committee, including appointing a new Chief Financial Officer, Chief Compliance Officer, and General Counsel.
Since my neutral outlook on Super Micro Computer stock was primarily due to uncertainty surrounding the fraud allegations, and those allegations have now been largely disproven, the path to a more bullish outlook seems clear, in theory. Super Micro Computer is well-positioned in a booming niche, driven by the rise of Generative AI. The company is a leading provider of high-performance servers, with a strong focus on energy efficiency—a key demand in the growing AI and data center markets.
Additionally, Super Micro’s growth has been impressive, with revenues increasing by 110% year-over-year and a CAGR of 61% over the past three years. The company has also delivered solid profitability growth, with operating income rising 66.29% year-over-year. What makes the stock even more attractive is the valuation, particularly after the recent pullback.
Although SMCI shares have rebounded and are currently trading higher than they were in recent weeks, the stock still trades at relatively cheap multiples, especially when considering the company’s strong growth trajectory. Super Micro Computer currently trades at a forward P/E ratio of 14.8x. When factoring in a projected EPS CAGR of 37.5% over the next three to five years, the stock has a PEG ratio of 0.4x, indicating that it may be undervalued—or at least that the stock has been de-risked.
Despite the bullish points mentioned earlier, there are still some concerns to consider. First, while the stock is arguably undervalued, Super Micro Computer’s preliminary Q1 results indicate a Q2 revenue guidance of $5.8 billion, which is 15% below consensus. This miss could signal potential issues with the company’s supply-demand dynamics or an over-allocation of inventory.
The timing is particularly noteworthy, as Super Micro is preparing for the launch of Nvidia’s (NVDA) new Blackwell GPUs, which could have otherwise contributed to stronger financial results. If the company ends up overstocked with inventory, it may be forced to sell at lower prices, which could further pressure margins.
This risk is compounded by the fact that gross margins have already been on a downward trend since Fiscal 2024, falling from 17.5% to 13.3% over the past four quarters.
At TipRanks, the current consensus for SMCI is neutral, with a Hold rating. This is based on two bullish analysts, five neutral analysts, and two bearish analysts. In addition, the average price target is $38.57, suggesting a downside potential of 4.1% from the latest share price.
With the charges cleared, Super Micro’s stock is, in theory, “free” to be valued based on its full growth potential and strong fundamentals. However, there may still be significant volatility ahead. The company will need to deal with changes in its C-suite and will likely encounter headwinds from shrinking margins and potential inventory adjustments, particularly given its soft guidance and a less-than-rosy outlook.
As a result, although the stock is undeniably cheap, I prefer to remain on the sidelines for now and wait for the dust to settle before making a more optimistic decision regarding SMCI’s investment thesis.
Source: finance.yahoo.com