News that Super Micro Computer’s financial auditor has resigned has resulted in surging bearish sentiment on the stock.
Super Micro Computer (SMCI -11.97%) stock is getting crushed again in Thursday’s trading. The company’s share price was down 11.7% as of 1:45 p.m. ET, and had been down as much as 17.7% earlier in the daily session.
Yesterday, Supermicro submitted a filing to the Securities and Exchange Commission (SEC) revealing that Ernst & Young (EY) had resigned from its role as the company’s accounting firm and auditor. EY also published its resignation letter and outlined general reasons for stepping back from the role. Following the news, Supermicro stock has been hit with coverage suspensions and ratings downgrades from analysts.
Analysts are repositioning on Supermicro stock
Ernst & Young’s resignation has dealt a dramatic blow to Supermicro stock. In EY’s resignation letter, the Big Four accounting firm said that it was stepping back as a result of “information that has recently come to our attention, which has led us to no longer be able to rely on management’s and the audit committee’s representations.” EY also indicated that it saw reputational risks in being associated with financial statements made by Supermicro.
Following the resignation news, Needham suspended coverage on Supermicro yesterday after previously having a buy rating on the stock. Today, Argus cut its rating on Supermicro from buy to neutral. Both investment firms cited EY’s resignation and a Department of Justice (DoJ) investigation into Supermicro as reasons for shifts in their coverage of the stock.
What’s next for Supermicro?
While Supermicro management reiterated that it did not expect material restatements for previously submitted financial results, investors have becoming increasingly worried that the tech specialist’s statements may not be reliable. Additionally, Supermicro’s upcoming quarterly results could be unaudited if the company goes ahead with plans to publish results on Nov. 5, which it announced it would do yesterday. If the company does publish unaudited results, investors may have a hard time putting faith in the numbers that it prints.
The situation surrounding Supermicro is an unusual one. The company produces high-quality, in-demand products, and it’s seen its sales and earnings soar thanks to artificial intelligence (AI) trends. On the other hand, the delayed filing of the company’s 10-K report, news of an investigation into the business by the DoJ, and the recent resignation of its auditor raise serious concerns and make it virtually impossible to assess and value the company along traditional lines.
Finding a new auditor is a crucial next step for the company. Supermicro stock is already in danger of being delisted from the Nasdaq exchange due to missing 10-K filing deadlines, and Ernst & Young’s resignation as auditor will make it difficult for the tech company to get the report filed on time. While Supermicro may be able to negotiate an extension for filing the report, its stock faces a significant risk of being delisted. Shares could continue to trade on the over-the-counter market, but delisting would likely trigger more big sell-offs for the stock.
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.
