Super Microcomputer (NASDAQ: SMCI )The AI server maker, has taken investors on a wild ride over the past three months.
The company’s troubles began at the end of August with a short-selling report by Hindenburg Research, which alleged a wide range of accounting irregularities. The 10-K filing was delayed, and in September the Justice Department reportedly opened an investigation into the company. A warning to remove the list has also been received Nasdaq stock exchange Last month, the company’s woes reached a fever pitch when its the auditorErnst & Young, resigned, and it also delayed its first-quarter 10-Q filing. It released preliminary first-quarter results but was unable to issue a full report, and the stock continued to climb, hitting a low of $17.25 on Nov. 15 before Nasdaq’s deadline to remain in compliance. This represents a 69% decline from before the short-selling attack.
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However, since then, Supermicro has found some respite with investors as it hired a new auditor and sent a compliance plan to Nasdaq. As of November 22, the stock was up 92% from the November 15 low.
Investors clearly see potential for a recovery in Supermicro stock, but if you’re considering buying it, you should understand the risks the company still faces. Let’s review some of the things you should know.
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Investors cheered on Nov. 18 when Supermicro announced it had hired BDO USA as its new auditor, but that may be a bigger risk than investors thought as BDO faces its own regulatory woes.
For example, the company was fined $2 million last year for failing to properly calculate revenue in a 2018 audit.
An audit quality report from the Public Company Accounting Oversight Board found material errors in 54% of BDO audits from 2020 that were examined and 53% in 2021. The BDO has also said it has invested in improving the quality of its audits, identifying errors earlier.
BDO’s own challenges do not indicate anything wrong with Supermicro hiring them, but it could also leave room for doubt if and when Supermicro files its pending reports. It also does not rule out Ernst & Young’s decision to resign as auditor, and its comment that it was “unwilling to be bound by the financial statements prepared by management.” Ernst & Young also said it could not rely on management’s representations.
Super Microcomputer is still listed on Nasdaq and its letter to Nasdaq has given it more time, but it is still out of compliance.
In fact, Nasdaq sent another letter to Supermicro on November 20 saying it was not in compliance with Nasdaq listing rules. “This letter has no immediate effect on the listing or trading of its stock on Nasdaq,” Supermicro said.
Relatedly, investors are still waiting to see the report of Supermicro’s independent special committee, which was supposed to submit a report on remedial measures to improve its internal governance by November 15.
Supermicro continues to say it expects to file its 10-K, though it is unable to predict its timing.
It is unclear what the problem with Supermicro’s accounting is, but the Hindenburg report makes a variety of allegations against the company, including channel filling to generate false revenue, recognizing incomplete sales, and avoiding internal accounting controls. is included It also describes related party conflicts and undisclosed related party transactions.
Financial disagreements between management and Ernst & Young were likely deep and material, as it is highly unusual for an auditor to resign.
Supermicro may be able to overcome these issues in the long run. After all, the company makes real products and was even tested by name nvidia Call on its recent earnings as one of the many partners it works with.
Right now, Supermicro is in better shape than it was when it had no auditor and the Nasdaq deadline was rising, but that’s very different from its financial reporting being in good shape. The longer its filing is delayed, the worse it looks for Supermicro, and the more widespread its accounting problems are likely to be.
Another pullback in the stock seems likely as Supermicro has yet to fix any of the underlying issues that caused the stock to fall. Investors should approach the stock with caution. It is not suitable for long term investment until there is more clarity about its accounting malpractices.
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