Super Micro Computer ( SMCI ) has had an incredible start to the year as shares quadrupled between January and mid-March. The addition of tech hardware stocks (with links to AI) to the index on March 18, 2024 qualified Super Micro for S&P 500 inclusion. , shares have fallen more than 50% since then.
One of the major developments was the Hindenburg Research report, which contained disturbing allegations about the company’s financial statements. Judging those allegations against Super Micro’s fundamentals, I maintain a neutral rating on the stock.
Hindenburg casts doubt on super micro
The Hindenburg report is actually the main reason I’m neutral rather than bullish on SMCI stock, and I believe it has caused reluctance among many AI stock analysts and investors.
The allegations are fairly straightforward. According to Hindenburg, super micro accounting involves manipulation that includes “sibling self-dealing and obstacle avoidance”. Anyone who cares should remember that the SEC charged Super Micro with widespread accounting violations in August 2020, and Hindenburg’s report argued that most of those involved in those accounting irregularities were back on Super Micro’s board.
Hindenburg’s team interviewed several Super Micro vendors and employees while compiling their report. It doesn’t help that Super Micro delayed its 10-K filing to assess internal controls shortly after Hindenburg went public with its concerns. Although this is a coincidence, the timing is troubling. Looking back several years, Super Micro failed to file financial statements in 2018, resulting in a short delisting from Nasdaq.
Earlier this month, Super Micro publicly denied the allegations, with CEO Charles Liang firing back. Super Micro has not provided any further statements since then.
The development of artificial intelligence is undeniable
Super Micro’s position as part of the fast-moving world of AI is one of the few reasons I’m neutral rather than bearish on SMCI stock. The exciting prospects for the Company’s business and the serious nature of Hindenburg’s charges essentially offset each other.
It’s hard to know what’s real and what’s fake here, but most people agree that the AI industry as a whole offers compelling growth opportunities. Nvidia ( NVDA ) has been posting triple-digit year-over-year revenue growth for several quarters. Other tech giants have incorporated artificial intelligence into their core businesses and delivered impressive results to their stakeholders. For example, Alphabet ( GOOGL ) saw its cloud revenue grow 28.8% year-over-year as more businesses rushed to build their own AI tools.
The artificial intelligence industry is projected to maintain a CAGR of 19.3% through 2034. The AI industry should continue to grow, and it should raise the super-micro. The company should benefit from Nvidia’s growth, which is why the company posted exceptional revenue and net income growth during Nvidia’s boom. That is what we have seen in many parts. If the allegations leveling the company have merit, we don’t know how accurate all the numbers were.
Super Micro has a strong fund at face value
While it’s impossible to ignore Hindenburg’s accusations against Super Micro, it’s still worthwhile to evaluate the company’s previous quarterly results. Stocks plummeted even before Hindenburg issued its report. In March 2024, I argued that SMCI shares faced risks, and until Hindenburg confounded that belief, I felt the shares presented a huge buying opportunity in late summer.
In its last reported quarter, Super Micro reported net sales of $5.31 billion, representing a 143% year-over-year increase. Meanwhile, net income rose 82% year over year to $353 million. At the time of launch, my primary concern was Super Micro’s shrinking net profit margin. Super Micro currently trades at a trailing P/E ratio of 20x, more than enough to offset the erosion in profit margins. SMCI stock trades at a ridiculous 13.6x forward P/E ratio, but recent speed bumps (the Hindenburg report and the DOJ investigation) have investors reluctant to bid multiples higher than the valuation.
We have no concrete evidence that Super Micro was involved in any wrongdoing, as Hindenburg alleges. However, their report certainly cast a black eye on the stock. I expect Super Micro to have performed remarkably well in its 2023 financial results, barring missteps.
Department of Justice examines super-microcomputer
The Super Micro controversy added a new chapter on September 26 when news crossed the wires that the US Department of Justice is now investigating the company. SMCI shares tumbled an additional 12% on the news, and shares were trading below a third of their all-time low as recently as March. The stock has high risk/reward at this point, but the high risks sideline me with a neutral rating.
Super Micro shares surged more than 4% on Friday, September 27, with many investors believing the long-term potential for the business is worth the heightened uncertainty.
Is Super Micro Stock Rated to Buy?
While ratings for this stock can change quickly, Super Micro currently has 2 buy ratings, 10 hold ratings and 1 sell rating from 13 analysts. SMCI’s average price target is $613.92, representing a near 50% upside. However, it is quite possible that several research brokers are keeping their SMCI ratings under review. SMCI shares have some lower price targets, including $454, $375 and $325 from CFRA, Wells Fargo ( WFC ) and Susquehanna, respectively. All of these price targets were established before the DOJ investigation was announced, so they may even come down.
Tax under SMCI shares
An old saying suggests, “You either die a hero or live long as a villain.” That quote seems apt for this company. Super Micro made huge profits for many investors when its share price exceeded $1,000 per share. Late entrants to the story have not fared well, including the addition of SMCI stock to the S&P 500. Many investors are currently sitting on significant losses. Depending on what those investors do, it’s hard to say how much of a negative impact super-micro stocks might have until more clarity on the tests.
If the company’s recent financials are accurate, SMCI shares look very attractive here. If the Hindenburg report loses relevance, stocks could rise quickly, though that outcome is hard to predict. I’m a big fan of Super Micro’s industrial and AI-related business potential. I have a neutral position here. Meanwhile, I don’t expect SMCI’s stock to recover above $460 (the approximate price before news of the DOJ probe) without any resolution to the two main threats to shareholder value.
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2024-09-29 02:13:18