Super Micro Computer (SMCI 11.62%) has taken investors on quite the roller coaster ride in 2024. It started the year at around $28 per share, then rocketed up to nearly $120 in March. It has since given up all of those gains and now trades back at the mark it started the year at, although it dipped to around $21 just a few days ago.
That is whiplash that most investors don’t expect to see, but there is a good reason for the rise and fall of Supermicro (as the company is often called for short). With the stock now down around 75% from its all-time high, could it be set for a comeback story in 2025?
AI demand caused Super Micro Computer’s business to boom
Supermicro makes components for data centers and computing servers and also sells full servers. One of its selling points is that it makes liquid-cooled servers, which are vastly more energy efficient and reduce the size of the room they need to be placed in because they do not need the same amount of airflow as traditional servers.
These advantages caused demand for its products to skyrocket throughout 2024 as companies raced to build out computing power to capture the gigantic artificial intelligence (AI) demand. As a result, revenue soared in 2024, with many quarters of more than 100% growth.
SMCI revenue (TTM) data by YCharts; TTM = trailing 12 months.
That is, if you can trust what management told you. While part of Supermicro’s fall from grace came from having risen too far, too fast, the largest part of its tumble came from accounting fraud allegations.
Can you trust what management tells you?
It all started when famed short-seller Hindenburg Research released a short report on Supermicro. Short-sellers make money when the stock price goes down, so their intentions aren’t always pure, and Hindenburg has had a few swings and misses.
Its short report centered around accounting malpractice, something for which Supermicro was fined by the Securities and Exchange Commission in 2020 due to accounting issues in 2018.
The day after Hindenburg’s report, Supermicro issued a press release stating that it is delaying its end-of-year form 10-K to assess “the design and operating effectiveness of its internal controls over financial reporting.” The combination of those two news reports caused the stock to drop like a rock in a few days. Then, the Wall Street Journal reported that the Department of Justice initiated a probe into the company, causing the stock to fall further.
At this point, Supermicro’s accounting practices were in question, but it was all speculation whether there were actual issues. However, Supermicro’s auditor, EY (formerly Ernst & Young), resigned because it said it was “unwilling to be associated” with what management was reporting.
Auditors have access to far more information than the average investor, and when they run for the hills, it may be wise to follow suit. This caused the stock to plummet even further and wipe out all of its gains for 2024.
With the stock down so much, investors may be forgiven for thinking this could be an excellent value play, as the business still has significant tailwinds on the horizon thanks to AI. However, there are other considerations with the stock.
Even if Supermicro’s business continues to grow, there is no trust in management. As a result, many institutional investors will avoid the stock entirely, making it difficult for its stock price to rise because there isn’t big money to move the price.
Trusting a company’s statements to investors is paramount in investing, and there’s no reason to do that with Supermicro right now.
A new management team could be a key factor in restoring that trust. However, with CEO Charles Liang being the founder, president, CEO, and chairman of the board, that’s unlikely to happen.
But there’s a new chapter to Supermicro’s story. It has appointed BDO, a large and respected firm, as its new auditor and has issued a plan to get its 10-K and first-quarter 10-Q forms filed in a timely manner. This news caused the stock price to pop about 30%, which could ignite a huge run-up if investors start to trust the company. However, just because there’s a new auditor doesn’t mean Supermicro’s financials are immediately fixed. There still could be issues regarding its reporting.
Super Micro Computer could be a massive comeback story in 2025. However, I still think investors are better off avoiding the stock, as there is just too much that’s unknown right now, and things could get far worse before they get better. There are far better investments available than taking on substantial risk with Supermicro, and I would put my dollars in those other stocks first.
Keithen Drury 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.
