When I think about stocks with millionaire-maker potential, I typically envision fast-growing companies with small valuations — two characteristics Super Micro Computer (SMCI 11.62%) has in spades. However, the data center hardware maker is cheap for a reason. Let’s explore whether or not the company can overcome its near-term accounting challenges to unlock explosive shareholder value.
Getting back on the right track?
Supermicro’s problem started on Aug. 7, when short-seller organization Hindenburg Research released a scathing report accusing it of accounting manipulation, self-dealing, and sanctions evasions related to the Russian invasion of Ukraine. Later, the company delayed releasing its annual report, putting it in danger of delisting from the Nasdaq Stock Market.
The situation worsened when Supermicro’s then-auditor, Ernst & Young, resigned on Oct. 30, citing months of disagreements with management and an unwillingness to be associated with its financial statements. All in all, these developments wreaked havoc on the stock, sending shares down 76% year to date from their all-time high of $119 reached in March. However, the company already looks set to overcome some of these challenges.
On Nov. 19, Supermicro named a new auditor, BDO, which will help it file its annual report and execute its plan to regain compliance with the Nasdaq and avoid delisting.
There is still some uncertainty because the Nasdaq still has to approve Supermicro’s plan to regain compliance, which isn’t guaranteed. However, if successful, this development could boost the company’s valuation. A delisting would hurt the company’s liquidity and make shares less attractive to mainstream asset managers, who often avoid investing in stocks listed on less regulated, over-the-counter exchanges.
Business is still booming
The sooner Supermicro’s accounting situation is cleared up, the sooner the market will begin paying attention to its stellar fundamentals. And the numbers look encouraging. Earlier this month, management released an unaudited update from its independent special committee detailing preliminary financial data corresponding to its fiscal first quarter.
Net sales are expected to be between $5.9 billion and $6 billion. While this is significantly below prior guidance of $6 billion to $7 billion, it represents a 180% year-over-year growth rate compared to the prior-year period. Furthermore, Supermicro has plenty of catalysts for continued growth.
As a server maker, the company turns artificial intelligence (AI) graphics processing units (GPUs) created by companies like Nvidia and Advanced Micro Devices into consumer-ready computer servers.
This niche allows it to benefit from high-demand products created by its suppliers, such as the new Nvidia Blackwell AI chips expected to ramp up production and sales in 2025. These chips offer significant speed and efficiency advantages over the previous generation of Nvidia chips, potentially making them a must-have for companies that want to remain relevant in the industry. AMD is also releasing another generation of AI chips called the Instinct MI325X, designed to rival Nvidia’s Blackwell.
Image source: Getty Images.
The valuation is fantastic — but don’t get carried away
With a forward price-to-earnings (P/E) of just 6.3, Supermicro’s stock is stunningly cheap compared to its triple-digit growth rate. And while investors should take its unaudited first-quarter results with a grain of salt, they demonstrate a business with clear millionaire-maker potential if or when the accounting-related uncertainty is resolved.
That said, Supermicro’s core operations aren’t immune from potential fallout. The legal and regulatory uncertainty surrounding the company could encourage suppliers and customers to shift orders away to avoid any potential disruptions. Investors should carefully weigh the pros and cons before considering a position in the stock.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
