Shares of Super Micro Computer (SMCI) have been at the center of controversy in recent months due to allegations of accounting fraud from a short-selling firm that sent its shares tumbling. While the much-anticipated verdict in the case has come in Super Micro’s favor, leading to a rebound in shares, there are still issues with the company’s growth story that cause me to remain neutral for now.
While the stock’s valuations remain attractive, even after the recent rebound, this article will outline why caution is still warranted in the short to medium term.
To give some context as to why I had a Keep rating on shares of Super Micro Computer (SMCI), the company has recently come under scrutiny due to a report published by Hindenburg Researcha prominent short selling firm that also held short positions in SMCI. In the report, Hindenburg accused Super Micro of accounting manipulation, among other problems. The main allegations centered around Super Micro allegedly selling its products to businesses that were already somehow associated with the firm.
This cast doubt on the validity of Super Micro’s sales and profits, suggesting that demand was not organic. As a result, questions arose about the need for a closer inspection of the company’s accounting balance sheet. These accusations have gained momentum, in part because Super Micro has faced similar problems in the past. In August 2020, the company settled with the SEC for $17.5 million over massive accounting violations.
Notably, some senior executives involved in the scandal were later rehired, raising concerns about the company’s internal controls and governance. As a result of the latest allegations, SMCI shareholders suffered significant losses following the release of the Hindenburg Report. Despite the high figures at the beginning of the year— shares surged 75% before the report — Super Micro shares plunged more than 60% in two weeks.
Although skepticism about the fraud allegations had already begun to dissipate, and the stock had recovered more than 80% between its November 15 lows, the final verdict was delivered on December 2, providing a positive outcome for investors in Super Micro Computer. A special commission is investigating no evidence of violations was found management or board of directors.
However, it is important to note that the special committee was part of the Super Micro board, meaning it was not a completely independent body. As a result a review of the company’s financial performance is not required. The news sent SMCI shares soaring, up more than 31% following the announcement. The committee’s key statement read: “The evidence reviewed by the ad hoc committee did not raise serious concerns about the integrity of Super Micro’s senior management or audit committee.”
However, it should be noted that the use of the word “substantial” means that there were some results in the particular processes, even if they were not considered to be significant. In response, Super Micro committed to implementing the investigative committee’s recommendations, including appointing a new chief financial officer, chief compliance officer and general counsel.
Since my neutral view of Super Micro Computer stock was mainly driven by the uncertainty surrounding the fraud allegations, and those allegations have now been largely disproved, in theory the path to a more optimistic outlook seems clear. Super Micro Computer is well positioned in a niche that is being developed by the rise of Generative AI. The company is a leading supplier of high-performance servers with a strong focus on energy efficiency – a key demand in the growing AI and data center markets.
Additionally, Super Micro’s growth has been impressive, with revenues up 110% year-over-year and a CAGR of 61% over the past three years. The company also delivered solid profitability growth, with operating profit up 66.29% year-over-year. What makes the stock even more attractive is the valuation, especially after the recent pullback.
While SMCI stock has rebounded and is currently trading higher than it has been in recent weeks, the stock is still trading at relatively low multiples, especially given the company’s strong growth trajectory. Super Micro Computer currently trades at a forward P/E ratio of 14.8x. Given a projected EPS CAGR of 37.5% over the next three to five years, the stock’s PEG ratio is 0.4x, indicating that it may be undervalued — or at least that the stock has been de-risked .
Despite the bullish points mentioned earlier, there are still some issues to consider. First, while the stock may be undervalued, Super Micro Computer’s preliminary Q1 results show Q2 revenue of $5.8 billion, 15% below consensus. This miss could signal potential problems with the company’s supply and demand dynamics or over-allocation of inventory.
The timing is particularly noteworthy as Super Micro prepares to launch Nvidia’s ( NVDA ) new Blackwell GPUs, which could otherwise contribute to stronger financial results. If a company finds itself with excess inventory, it may be forced to sell at lower prices, which could increase pressure on margins.
This risk is compounded by the fact that gross margins are already on a downward trend from fiscal 2024, falling from 17.5% to 13.3% over the past four quarters.
On TipRanks, the current consensus for SMCI is Neutral with a Hold rating. This is based on two bullish analysts, five neutral analysts and two bearish analysts. In addition, Art the average target price is $38.57which implies a downside potential of 4.1% from the stock’s last price.
After the charges are dismissed, Super Micro stock is theoretically “free” to appreciate based on its full growth potential and strong fundamentals. However, there could still be significant volatility ahead. The company will have to deal with changes in its management and is likely to face headwinds from shrinking margins and possible inventory adjustments, especially given its soft guidance and less-than-rosy outlook.
As a result, while the stock is undeniably cheap, I prefer to sit back for now and wait for the dust to settle before making a more optimistic decision about SMCI’s investment thesis.
