Red flags from Super Micro are a stop sign for cautious buyers

(Bloomberg) — What has been one of the hottest artificial intelligence plays on Wall Street has been hit by bad news, with buyers staying away as accounting questions hover over the stock.

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Shares of Super Micro Computer Inc. are on pace for their worst month in nearly six years after allegations of accounting problems by a missing vendor and a delayed 10-K filing for which the company said it needed more time to assess its internal controls . A disappointing earnings report in early August also rattled stocks.

It’s a sharp turnaround for a key beneficiary of AI infrastructure spending. Added to the S&P 500 in March, Super Micro shares have since fallen 64% below a peak that month. Shares are down as much as 36% this week, including Friday’s plunge of as much as 6.5%.

Hindenburg Research on Tuesday said the company was short because an investigation revealed “egregious accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures and customer issues.” On Wednesday, the firm said it would delay filing its annual financial disclosures.

A Super Micro spokesman declined to comment on the Hindenburg report. Asked for comment on the filing delay, the spokesman said “additional time is needed to evaluate some internal controls” and that the company had not updated its announced financial results for the most recent fiscal year and quarter.

“The 10K delay only adds to the uncertainty, even though AI servers remain a tremendous business,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services. “I see the stock going down significantly from here.”

Other analysts are sour on the stock market. Bank of America moved its rating to below review on Thursday, writing that “the delay in the filing and any potential findings from the review lead to more uncertainty and leave us unable to assess the company’s fundamentals.”

This was followed by the CFRA, which downgraded the Super Micro after the Hindenburg report. “While we believe the evidence presented does not conclusively demonstrate significant accounting malpractice or verifiable evasion of penalties, SMCI’s late 10-K filing and potential reputational damage raise concerns,” it wrote.

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Few are enticed by a valuation that has fallen to levels that might be attractive under other circumstances. The stock trades below 12 times estimated earnings, a fraction of its recent peak of nearly 40 and a discount to its 10-year average.

In terms of estimated earnings, Super Micro trades at 0.9 times, making it the third cheapest stock in the Nasdaq 100 by that measure. Two of the most expensive, on the other hand, are also connected to AI: Nvidia Corp. trades at 19 times estimated earnings, and Arm Holdings Plc tops the list at more than 30 times.

Kaufman said the late filing exacerbated his broader concerns about how long spending on AI infrastructure will continue to grow at high rates. That issue contributed to a 6.4% drop in Nvidia Corp. on Thursday after the AI-focused chipmaker gave a forecast that failed to live up to its most optimistic hopes.

This is not the first time Super Micro has faced accounting questions. In 2020, the company settled a US Securities and Exchange Commission investigation into its accounting and disclosures for its 2014-2017 fiscal years by correcting its financial statements and paying a penalty, while promising not to do so again of future violations.

For many, that episode has been forgotten as AI has taken Wall Street by storm. Super Micro sells high-powered servers for data centers and has seen an explosion in both sales and investor interest. Revenue growth topped 140% in its most recent quarter, when it also gave a much stronger-than-expected sales forecast. Revenue tripled this quarter, according to data compiled by Bloomberg.

The stock, which is up nearly 250% in 2023, continues to have some defenders. Rosenblatt Securities wrote that “a delay of 10K is not a good picture, obviously,” but that “the business remains strong and healthy and there have been no changes in the company’s financial results.” The selloff, added analyst Hans Mosesmann, “seems overdone.”

Of course, investors looking for exposure to AI servers have other options, including Dell Technologies Inc., which reported better-than-expected earnings on Thursday based on AI server growth. Dell gained 3.4% on Friday.

While there’s a chance this could turn out to be a buying opportunity for investors, “this is still an unknown and there’s no reason to take that risk when Dell looks cheap, it’s also well positioned on servers and doesn’t have these tomatoes. flags,” said Adam Sarhan, executive director at 50 Park Investments. “It will take time for Super Micro to regain confidence, and while you can jump in now, you would really be swimming at your own risk.”

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A pair of e-commerce companies have seen divergent fortunes this year, with eBay up 34% in 2024 at its last close, while Etsy fell 32%. An exchange-traded fund that tracks online commerce rose less than 4 percent. Online auction company eBay was supported by better-than-expected earnings, and Bloomberg Intelligence wrote on Thursday that it sees potential for growth in gross merchandise volume and buyer retention. In contrast, Etsy’s latest report was met with caution.

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Earnings due Friday

–With the help of Jeran Wittenstein.

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