Super Micro Computer: You’re Gambling If You Buy This, Not Investing

Summary:

• SMCI’s recent auditor resignation, and ongoing DoJ investigation make it a highly risky investment despite a recent short-term price surge.
• SMCI’s past issues include NASDAQ delisting, SEC fines, which all raise serious concerns about its financial integrity.
• The appointment of BDO as the new auditor offers some hope but doesn’t eliminate the significant risks and unresolved issues identified by Ernst & Young.
• Investing in SMCI now is more akin to gambling than smart investing due to the high level of unknowns and potential for severe negative outcomes.

Introduction

I mostly like to talk about buying opportunities here on Seeking Alpha, but I’ve noted that a lot of people have been buying Super Micro Computer (NASDAQ:SMCI) recently, post the news that they appointed BDO as auditor.

Despite this appointment having some potential good news and a sign of hope, there’s way too many unknowns and risk factors that, as investors on the outside, we just don’t know the answers to. Of course, when we invest, there’s always some unknowns and risks to take, but for me here, there’s just way too many unknowns, which makes it a very illogical investment.

Background

SMCI has been on a crazy ride throughout 2024, rising from $28 back in January all the way up to $115 in March, which equates to a 307% increase in 3 months.

It then dropped down to $18 by November 15th, erasing 85% of the total market cap. This drop came after Ernst & Young (SMCI’s auditor) resigned on October 24th. Ernst & Young cited reasons including:

• Lack of trust in management
• Weak internal controls
• Lack of board independence

When an auditor resigns from auditing a client the size of SMCI it’s never a good sign. Auditors spend hours fighting to win over the biggest clients which allows them to rake in the huge audit fees, but when they deem the risk of being associated with a listed client to be far more negative than the huge audit fees they would receive, there’s likely something out of the ordinary going on.

Here’s why SMCI is not worth investing into.

If this auditor resignation was a one-off issue, then I’d be inclined to give SMCI the benefit of doubt (though I’d still remain extremely cautious), but unfortunately this negativity around SMCI is not a one-off at all.

The past 6 years has seen:

• NASDAQ delisting
• $17.5 million fine to SEC
• Hindenburg Research (one of the most famous short sellers)
• Department of Justice probe

I’m going to go over each one of these to explain exactly what’s happened and my take on them all.

NASDAQ delisting – 2018

SMCI was temporarily delisted from the NASDAQ stock exchange in August 2018 due to failure to comply with NASDAQ timelines of financial reports. Companies get delisted for many reasons, however the 3 main reasons are:

1. Voluntary delisting.
2. Falling below a certain market cap or $1.00 stock price.
3. Accounting issues/missed deadlines.

Reason 3 is exactly why SMCI got delisted, and it tends to be the least common and perhaps most serious due to the internal inefficiencies. NASDAQ generally does have fairly long “grace periods” meaning SMCI failed to comply with the extended NASDAQ deadlines, something which has not happened to a company of SMCI’s size in a long time.

Fine

In 2020, SMCI paid a $17.5 million fine to the SEC for accounting violations in which they neither admitted nor denied the SEC findings. The violations were due to incorrect revenue recognition, understating expenses, and other accounting violations over a period of 3 years.

Arguably a one-off instance like this would not cause too much panic, but the continuous nature of this raises skepticism.

Department of Justice

On top of all this negativity, SMCI has an ongoing DoJ (Department of Justice) probe which is looking into accounting violations. DoJ probes are a big deal and are likely to have an overarching effect on the SMCI stock price even if all of all the other unknowns start to become more clear.

As I mentioned before with the Hindenburg research, we have to take their report with a pinch of salt since they are a short-seller after all. However, an investigation by the DoJ is much more serious and anything that comes up in that investigation will materially affect SMCI’s future.

BDO Appointment

The positive news after all of this is that SMCI managed to appoint BDO (the 5th largest accounting firm) after all of the above incidents, which has to be a win because it gives them hope to at least restore investor confidence, and prepare some financial statements. That’s all the good news I can say about this though.

The bad news is that BDO isn’t a big 4 company that SMCI would have appointed. BDO also has had poor results over recent years in terms of audit quality. To put it simply, SMCI would not have wanted to appoint an auditor outside of the Big 4. It’s a shame that this is the way it is, but for a company in the S&P 500, Big 4 auditors are by far the most common. Unless there’s a good reason not to appoint a Big 4 auditor, S&P 500 companies simply look a bit more questionable if they don’t have a Big 4 company auditing them.

The other important thing to note is that even though SMCI has appointed a BDO, initial screening or conversations with EY (previous auditor) have not occurred. This was all disclosed in the 8-K but obviously wasn’t part of the headlines. Simply what is happening is that BDO are the only company to at least consider looking at the SMCI books in the hope that everything is ok, and therefore they potentially have one of the biggest clients on the books.

In my opinion, realistically, the issues that EY found won’t have been resolved and BDO will also likely find these issues, meaning they’ll not sign off.

Let me take this even further. A first year audit takes a long time. It includes getting a very solid understanding of the company, the internal controls, previous period’s numbers etc., etc. In my opinion, the entire process likely cannot happen before February 2025, which is when NASDAQ has granted a filing extension until.

If the BDO does manage to get all this work done, and assuming there’s no issues found (unlikely in my opinion), there is still a chance of secondary reviews by regulators.

So is SMCI a buy, sell, or hold?

SMCI has performed well the last 3 weeks post appointment of auditor, BDO, plus a short squeeze. Whilst the share price shows some potential signs of recovery, I hope this article made it clear exactly how much risk there still is.

SMCI still has to get BDO to audit their financials by February without any findings, a potential secondary review, and also get through the DoJ investigation to essentially survive. If any of these come back with material findings, I think there’s a very good chance that SMCI gets delisted, which will, of course, have material consequences for all investors.

Of course, I may be wrong here, and I may be overly worried about the legitimacy of the financials, but when there’s hundreds and if not thousands of other stocks without any risk of these issues, I don’t see why it’s worth risking an investment into SMCI.

My overall take is that I’d give it a 50:50 chance as to whether SMCI recovers and, in my opinion, investing in them is much more gambling, rather than data driven, educated, smart investing.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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