2 reasons to buy Supermicro Hand Over Fist shares – and 1 reason to stay away

What goes up can come down. Just look at Super Micro Computers (NASDAQ: SMCI)commonly referred to as Supermicro.

Shares of the technology solutions company have soared 246% in 2023. That momentum has continued into 2024, with Supermicro’s stock up another 318% through mid-March. From then on, however, it was all downhill. Supermicro is now more than 60% below its peak.

What should investors do? Here are two reasons to buy Supermicro’s stock with your fist – and one reason to stay away.

Reason to buy no. 1: growth prospects

Supermicro sells the building blocks for technology infrastructure: servers, storage systems, rack solutions, networking devices and more. To say that demand for the company’s solutions is hot is an understatement. Supermicro announced last month that sales were up 110% year-over-year in the quarter ended June 30. In a single quarter, the company raised more money than it did in the entire 2022 fiscal year.

Much of this spectacular growth has been driven by artificial intelligence (AI). Organizations in nearly every industry are striving to harness the power of AI, especially with the rapidly improving capabilities of generative AI.

Supermicro could be poised for even more growth as data centers deploy its direct liquid cooling (DLC) systems. This technology can provide a lower total cost of ownership than traditional air cooling systems.

NvidiaIts growth could largely fuel Supermicro’s growth. Although the shipment of Nvidia’s new Blackwell chips has been pushed back, the delay is only temporary. Nvidia CEO Jensen Huang predicts that Blackwell could become his company’s most successful product. If he’s right, Supermicro could be poised for more explosive growth.

Reason to buy no. 2: An attractive valuation

In today’s market environment, it’s not easy to find a tech stock that offers an attractive valuation. However, thanks to the strong selloff in recent months, Supermicro’s valuation looks attractive indeed.

The stock trades at a forward price-to-earnings ratio of just 13.1. That’s much lower than the average forward earnings multiple of 28.2 for S&P 500 the information technology sector. More importantly, Supermicro trades at a discount to its biggest rival, della.

Reason to stay away: A dark cloud of controversy

However, there’s also a major reason why investors might want to stay away from Supermicro with a 10-foot pole. The company is mired in a dark cloud of controversy over its financial accounting practices.

On August 27, Hindenburg Research published a report online alleging “accounting manipulation, sibling self-dealing and sanctions evasion” by Supermicro. Hindenburg said he conducted a three-month investigation that included interviewing former Supermicro employees. It claimed that this investigation “found glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures and customer issues”.

The story continues

The day after this scathing report appeared online, Supermicro announced that it does not expect to file its annual 10-K on time for the fiscal year ending June 30. The company said more time is needed for management to “complete its assessment of the design and operating effectiveness of its internal controls over financial reporting.”

Supermicro CEO Charles Liang released a letter on September 3 to address the controversy. He wrote that the company’s “production capabilities are not affected” by the allegations or the delay in filing its annual report. Liang also stated that management does not “anticipate any material change in financial results in the fourth quarter or fiscal year 2024.”

What should investors do?

Aggressive investors may decide to buy Supermicro shares to deliver the punch while it is being brought down. Such a strategy could pay off handsomely if the company’s growth prospects prove to be as promising as they seem and its internal control issues are satisfactorily addressed.

However, I think most investors would be better off taking a wait-and-see approach with Supermicro. Sure, Hindenburg Research is a short seller with a financial motivation to short Supermicro’s stock. But Supermicro’s 10K delay raises questions that would be troubling even if Hindenburg’s report had not been published.

If the controversy dies down, investors should still be able to buy Supermicro at a reasonable valuation. What goes down can go up, but it’s a good idea to make sure it will go up before you jump on board.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

2 Reasons to Buy Supermicro Stock Hand Over Fist — and 1 Reason to Stay Away was originally published by The Motley Fool