What Is Wrong with Supermicro Stock?

The luster around artificial intelligence has dulled of late as AI stocks like NVIDIA and Microsoft have taken a step back from their summer highs. Investor confidence has waned over concerns that the technology won’t live up to sky-high expectations.

Apprehensions about an AI bubble have played a part in the recent fall in Super Micro Computer Inc. (NASDAQ: SMCI) shares. After soaring above $1,200 in the first months of the year, SMCI has since plummeted by over 62%.

However, Supermicro’s issues don’t just derive from AI industry concerns. The company missed earnings expectations last quarter and guidance from Supermicro’s leadership didn’t wow investors.

There have also been disturbing allegations that Supermicro manipulated its accounting to provide false results to investors.

Supermicro’s response to the allegations was not as strong as many investors hoped, and there is still uncertainty about what will happen from here.

If the allegations turn out to be unfounded or exaggerated, SMCI may well be an AI stock that is selling at a substantial bargain.

What Is Wrong with Supermicro Stock?

A bearish report by short seller Hindenburg Research led to a big sell off in Supermicro stock as accusations of accounting irregularities surfaced.

More on that in a moment but first let’s address why the stock rose to popularity in the first place.

The company’s AI operations were built on the strength of its servers, which are often used as the infrastructure for Nvidia GPUs. The demand for AI servers is booming and the market is expected to grow at a compounded annual rate of 25% through 2029 and fuel annual revenues of roughly $73 billion.

Supermicro is reaping the benefits of that demand. In the fiscal fourth quarter of 2024, the company’s revenues rose by 143% from last year. Supermicro’s $5.3 billion in revenues also beat estimates by 0.09%.

The company’s net income of $352.7 million was an 82% increase when compared to the prior year but diluted EPS of $5.51 underperformed analysts’ estimates by over 23%. Supermicro’s gross margins also dropped 5.8% to 11.3% compared to last year.

Margins have fallen because it has invested significantly to meet demand for its liquid-cooled AI servers, but Supermicro’s management expects margins to normalize before the end of fiscal 2025.

The leadership team provided guidance that Q1 FY25 revenue is likely to be between $6 billion and $7 billion, which would mean between 183% and 230% year-over-year growth. The company expects between $26 billion and $30 billion in revenue in fiscal 2025, corresponding to an increase in the range of between 74% and 101%.

Will Supermicro Stock Keep Falling?

In addition to revenue growth, Supermicro made innovative steps forward in Q4, including being first to market with its 8U liquid-cooled clusters for Nvidia’s new Blackwell GPUs.

However, any recent highlights for the company have been overshadowed by allegations from short seller Hindenburg Research.

Hindenburg spent three months researching Supermicro’s accounting practices, and issued a report accusing Supermicro of accounting manipulation.

The short seller said it uncovered multiple red flags in Supermicro’s accounting processes and alleged Supermicro was using partial orders of defective products to inflate revenues.

Hindenburg wrote that “Supermicro benefitted as an early mover but still faces significant accounting, governance and compliance issues and offers an inferior product and service now being eroded away by more credible competition.”

Supermicro responded to the allegations with a statement that it would need additional time to investigate the allegations and to take stock of its financial reporting procedures. The company also said it would delay its annual filing and went on to say it didn’t expect any significant repercussions from the Hindenburg report.

As Hindenburg Research is a short seller, the company does have a vested interest in the price of SMCI falling. There is also the possibility that Hindenburg has misinterpreted the data in Supermicro’s filings.

However, this is not the first time that the AI company has been accused of accounting violations. In 2020, the U. S. Securities and Exchange Commission charged Supermicro with widespread accounting infractions. The SEC accused Supermicro of “prematurely recognizing revenue and understating expenses over a period of at least three years.”

Analysts’ Ratings For Supermicro Stock

Hindenburg Research made reference to the SEC’s previous allegations in its report and said that even after Supermicro’s $17.5 million dollar settlement, the company hired back many of its former personnel and continued its previous practices.

Whether Hinderburg is correct, there is no doubt that the allegations have had an effect on SMCI. Analysts at JPMorgan believe that volatility will linger and, as evidence of that forecast, SMCI was just downgraded and the new price targets for the stock sit between $500 and $950 per share.

As it stands, the consensus on Wall Street is to Hold the stock. Out of 20 analysts who have rated SMCI, 11 rate it is a Hold. The average price target for the stock is $671.87 per share, which corresponds to a 47% share price hike from present levels.

8 Buy ratings exist and the highest forecast is $1,300 per share, which translates to monumental 184% gain estimate over the next 12 months.

A single Sell rating on SMCI, and the lowest forecast implies Supermicro shares may drop by 44% to $255 per share in the coming year.

Is Supermicro Stock Undervalued?

Many Wall Street Analysts believe SMCI is oversold, and that might be substantiated by the stock’s price-to-earnings multiple of 22.8x. Supermicro’s P/E appears attractive compared with Nvidia’s 54.5 P/E and Microsoft’s 36.9.

While those companies have become associated with AI, they are much larger and have different business models than Supermicro, which is a relative upstart in a market that is dominated more by Dell and Hewlett Packard. Both of those companies have lower P/E multiples than Supermicro; Dell has a 21.6 P/E while HP’s is 12.2.

Is Supermicro Stock a Buy, Sell, or Hold?

Those companies are also much more firmly established and diversified companies that Supermicro. In addition, they haven’t faced the accounting manipulation allegations that Supermicro has on more than one occasion.

The Hindenburg allegations, an earnings miss, and the slowdown in AI enthusiasm have taken their toll on SMCI. While it is entirely possible that the stock has been oversold, there will continue to be volatility until there is more clarity on Supermicro’s financial situation.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.