Super Micro Computer (NASDAQ: SMCI), the AI server maker, has taken investors on a wild ride over the last three months.
The company’s troubles began with a short-seller report from Hindenburg Research at the end of August, alleging a wide range of accounting irregularities. That was shortly followed by a delay in the filing of its 10-K, and in September the Department of Justice reportedly opened up an investigation into the company. It also received a delisting warning from the Nasdaq stock exchange. Last month, the company’s troubles reached a fever pitch when its auditor, Ernst & Young, resigned, and it also delayed its first-quarter 10-Q filing. It released preliminary first-quarter results but was unable to release a complete report, and the stock continued to spiral, hitting bottom at an intraday low of $17.25 on Nov. 15 ahead of the Nasdaq’s deadline to stay in compliance. That marked a 69% decline from before the short-seller attack.
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However, since then, Supermicro has scored some redemption with investors as it hired a new auditor and sent a compliance plan to the Nasdaq. As of Nov. 22, the stock was up 92% from the low on Nov. 15.
Investors clearly see a recovery potential in Supermicro stock, but if you’re thinking of buying it, you should understand the risks the company still faces. Let’s review a few things you should know.
Investors cheered on Nov. 18 when Supermicro announced that it hired BDO USA as its new auditor, but that may be a bigger risk than investors think as BDO has faced its own regulatory problems.
For example, the company was fined $2 million last year for failing to correctly vet revenue calculations in a 2018 audit.
An audit quality report from the Public Company Accounting Oversight Board found significant mistakes in 54% of BDO audits from 2020 that it examined and 53% in 2021. BDO has also said it has made investments to improve the quality of its audits, recognizing its earlier mistakes.
BDO’s own challenges don’t indicate anything nefarious in Supermicro’s hiring them, but it could also leave room for doubts if and when Supermicro does file its outstanding reports. It also doesn’t undo Ernst & Young’s decision to resign as auditor, and its comment that it was “unwilling to be associated with the financial statements prepared by management.” That Ernst & Young also said it could not rely on management’s representations remains concerning.
