Super Micro Computer investors got some very concerning news today, and the stock is cratering.
Super Micro Computer (SMCI -32.67%) stock is getting crushed in Wednesday’s trading following news that the company’s auditing firm has resigned. The server specialist’s share price was down 31.6% as of 12:30 p.m. ET.
Supermicro published a regulatory filing with the Securities and Exchange Commission (SEC) today that revealed that Ernst & Young (EY) had resigned as its financial auditor. In its resignation letter, EY said that it was stepping back from the role because it could not “rely on management’s and the audit committee’s representations.”
Things just got much worse for Supermicro investors
News of EY’s resignation has raised a new round of concerns about accounting at Supermicro. In August, Hindenburg Research published a short seller’s report alleging that the tech company was a serial offender when it came to bad accounting and financial practices.
The next day, Supermicro announced that it was delaying the filing of its annual 10-K report — but management stated that it did not expect material restatements of previous results. The company had previously paid a $17.5 million fine to the SEC to resolve accounting issues.
What’s next for Supermicro stock?
Supermicro has seen its sales and earnings soar over the last year thanks to artificial intelligence (AI) intelligence trends, but concerns about accounting practices and other potential irregularities have cast a dark cloud over the stock. Today’s big sell-offs have pushed the stock down roughly 72% from the high it reached earlier this year, but the company’s share price is still up roughly 18% year to date. Despite reporting strong profit growth, the company is now valued at just 10 times this year’s expected earnings.
Super Micro Computer stock may look quite cheap based on price-to-earnings multiples and other metrics, but the uncertainty surrounding accounting issues and other potential regulatory problems means that attempting to value the company based on traditional means probably isn’t prudent.
The resignation of EY as the company’s auditor is a major red flag and raises the possibility that the stock could be removed from the S&P 500 index or delisted altogether. While it’s possible that Supermicro will emerge from these challenges and manage to allay investor concerns, the company has a lot of proving itself to do.
Until then, the prevailing market sentiment will likely reflect a “where there’s smoke, there’s fire” line of thinking. Investors will get a closer look when the tech specialist reports quarterly earnings and hosts a conference call on Nov. 5.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
