In the wake of the Hindenburg report, what will super micro computer stock do after its long-awaited stock split?

Stock splits have been a major part of market activity this year, with high-profile names such as Nvidia and Walmart launching such operations. And as you can see from my examples, they covered industries from technology to retail and beyond.

Why are investors so excited about stock splits? Well, they lower the per-share prices of often popular and popular players, making it easier for a wider range of investors to get into these stocks. And a stock split can often be viewed as a positive sign from management, suggesting belief in the stock’s ability to rise again. However, note that a stock split does not change the value of a stock or a person’s holdings. You end up with more shares at a lower price.

Investors have become excited about stock splits this year, and in many cases, this has helped propel those stocks from the announcement date to the actual split. For example, Nvidia is up nearly 30% over that period. But one stock in particular was an exception, and that’s the one involved in the next big market split, set for September 30. I’m talking about Super Micro Computer (SMCI -12.17%). Shares have fallen in recent weeks on a short seller’s report alleging problems at the company and extended losses later this week following a media report about a possible Justice Department investigation. What direction will this top artificial intelligence (AI) stock take after the stock split? Let’s look for some answers.

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Supermicro’s earnings and stock performance

First, let’s take a look at Supermicro’s recent and long-term performance as well as its earnings picture. This 30-year-old company has gradually built its business over time, but growth has only taken off in recent years as the AI ​​boom gained momentum. Supermicro makes workstations, servers and other products needed for AI data centers — and the company tailors them to each customer’s needs.

That’s helped Supermicro’s revenue explode higher over the past few years, with quarterly revenue in late 2023 surpassing annual revenue in 2021. And there’s reason to be bullish on Supermicro’s earnings progress. The company continues to operate in the growing AI market, which is expected to climb from $200 billion today to more than $1 trillion by the end of the decade. In addition, Supermicro has taken steps to increase volume and reduce costs, which is the focus of a new factory in Malaysia that will open later this year.

All of this has helped Supermicro’s stock rise over time — gaining 2,200% over the past five years. And in the first half of this year, Supermicro outperformed even market darling Nvidia when it climbed 188%.

So why the more than 30% drop since Supermicro’s stock split announcement in early August until now? Three items in particular weighed on the stock. First, an Aug. 27 report by short seller Hindenburg Research that alleged problems at the company, such as “accounting red flags,” hurt investor sentiment. Short sellers make money when a stock they are not shorting falls, so Hindenburg’s report should be taken with some skepticism. However, the day after Hindenburg released his report, Supermicro announced that it had delayed filing its annual 10-K report, and that has investors worried about potential changes to its earnings numbers.

In a Sept. 3 letter, the company reminded people that “when we announced the decision to delay filing our Annual Report, we indicated that, based on our work to date, we do not anticipate any material change in the fourth quarter or fiscal . financial results of 2024.” And it said the short seller’s report “contains false or inaccurate statements.”

Adding to the company’s woes, just this week, The Wall Street Journalciting unnamed people familiar with the matter, said the Justice Department is investigating Supermicro. A prosecutor from the U.S. attorney’s office in San Francisco has contacted people who may have relevant information, and the investigation is in its early stages, the newspaper reported.

Supermicro addresses the short report

Now let’s go back a bit. Earlier this month, Supermicro took issue with the short report, calling the statements in it “false or inaccurate.” The company also said it would fully address Hindenburg’s statements “in due course”. And as for the annual report delay, Supermicro said it doesn’t expect any significant change in earnings.

It’s also important to consider that Hindenburg has a short position in Supermicro, meaning it benefits from declines in the stock. In short selling, investors borrow shares to sell, then must buy them back — ideally at a lower price — to return to the original owner. As a result, Hindenburg tends to undervalue Supermicro’s stock, and this makes it difficult to rely on Hindenburg as a source of information. Ultimately, a Justice Department investigation was not confirmed, but if an investigation is confirmed at any point, that would not automatically indicate wrongdoing. Investors should also note that the Justice Department has been vigilant about tech companies and has launched investigations into others for various reasons.

Now let’s consider Supermicro’s potential performance after its stock split — but not just a few days from now, but instead about a year from now. A study of stocks from 1980 to the present shows that stocks that have split generally outperform S&P 500 from the date of the announcement of their split until the following 12 months. These stocks delivered an average total return of more than 25%, more than twice the average return of the S&P 500, Statista reports, citing Bank of America data. So history tells us that Supermicro could rise in the year following the next stock split.

Is history always right?

Of course, it is important to keep this history in mind it is not always right There are occasions when individual stocks or the market do not follow historical patterns. It is impossible to predict stock performance with 100% accuracy, especially in the short term, and one year is a short term for investors. And in Supermicro’s case, news of a possible probe could weigh on shares at least until the issues become clearer.

So what should investors do? If you’re a Supermicro shareholder, it’s best not to panic. From the information we know today, the company’s future looks bright. Demand for its products is strong, and interest in the company’s direct liquid cooling (DLC) technology to address heat in AI data centers could provide a new wave of growth going forward. Even if Supermicro’s stock suffers in the short term, it could rise significantly over a period of five years or more.

But what if you haven’t invested in Supermicro yet? Given the latest news, it’s probably best to wait for more information from the company and possibly the Justice Department before making any moves — that way, you’ll have more visibility and be more comfortable with your investment decision.