Super Micro Computer (SMCI 11.62%) shareholders have been through a whirlwind lately. While the stock is up 1,480% in the last two years, it has also fallen over 70% from its record high in the last eight months. As one of Nvidia‘s largest partners, the server maker should benefit as demand for artificial intelligence (AI) infrastructure increases, but Supermicro has also been accused of accounting manipulation.
Among the 12 analysts who follow the company, the median 12-month price target of $30.50 per share implies an 8% downside from its current share price of $33. That means six analysts think the stock will fall more than 8% in the next year. Additionally, 19 analysts followed Supermicro three months ago, meaning seven have recently discontinued coverage. Wall Street is clearly shying away from the company.
Here are the important details.
The bull case: Supermicro is a leading supplier of AI servers
Super Micro Computer builds servers, including full server racks equipped with storage and networking that provide customers with a turnkey solution for data center infrastructure. Its internal manufacturing capabilities and “building block” approach to product development let it bring new technologies to market more quickly than its competitors, often by two to six months.
Indeed, earlier this year, Rosenblatt analyst Hans Mosesmann wrote, “Super Micro has developed a model that is very, very quick to market. They usually have the widest portfolio of products when a new product comes out.” Those advantages have helped Supermicro secure a leadership position in AI servers, a market forecast to grow at 30% annually through 2033, according to Statista.
Importantly, Supermicro is also the top supplier of direct liquid cooling (DLC) systems, which could help the company strengthen its position in AI servers. DLC systems reduce data center power consumption by 40% and occupy 80% less space than traditional air-cooled systems. AI servers generate more heat than general-purpose servers, so demand for DLC systems is expected to rise quickly.
Indeed, while less than 1% of data centers have historically used liquid cooling, Supermicro estimates 15% (and maybe as many as 30%) of new data center installations will use liquid cooling in the next two years, and the company says it is positioned to “capture the majority share of that growth.”
Image source: Getty Images.
The bear case: Supermicro is beset by problems
As mentioned, while Supermicro shares are up 1,480% in the last two years, the stock has also nosedived more than 70% from its record high in the last eight months. Below is a month-by-month timeline detailing the events that led to that rapid decline in value.
- August 2024: Short-seller Hindenburg Research published a report accusing Supermicro of accounting violations, including improper revenue recognition, undisclosed related party transactions, and sanctions evasion. Subsequently, Supermicro delayed filing its Form 10-K for fiscal 2024, but CEO Charles Liang said the Hindenburg report contained “false or inaccurate statements.”
- September 2024: The Wall Street Journal reported that Supermicro was being probed by the Justice Department after a former employee filed a lawsuit accusing the company of accounting violations, some of which were mentioned in the Hindenburg report. Supermicro also got a letter of noncompliance from the Nasdaq Exchange, saying it had 60 days to file its 10-K or submit a plan to restore compliance.
- October 2024: Supermicro’s auditor, Ernst & Young, resigned. “We are resigning due to 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,” the company wrote in its resignation letter. Ernst & Young also said it was “unwilling to be associated with the financial statements prepared by management.”
- November 2024: Supermicro delayed its Form 10-Q for the first quarter of fiscal 2025. But the company hired BDO as its new auditor and submitted a compliance plan to Nasdaq before the deadline, saying it would become current with its filings in a timely manner. Now, the Nasdaq must either approve or reject that plan.
The situation is even more complicated than what I’ve just described because Supermicro was accused of similar accounting violations in the past. At that time, the company filed its Form 10-K for fiscal 2017 almost two years late and was fined $17.5 million by the Securities and Exchange Commission (SEC). Supermicro was also delisted from the Nasdaq Exchange for about 18 months, though shares advanced 73% during that period anyway.
Investors should avoid Supermicro stock right now
Supermicro shares could soar if the wrongdoings outlined by Hindenburg are found to be inaccurate and then nothing comes of the Justice Department probe. But investors should be at least a little skeptical, given that the SEC has fined the company for similar violations in the past, and Hindenburg says Supermicro has rehired three senior employees involved in the previous scandal.
In that context, I think prospective investors should avoid this stock right now. There are simply too many unknowns to make an educated decision, which probably explains why seven out of 19 Wall Street analysts discontinued coverage during the last three months. It may also explain why the remaining 12 analysts have set the stock with a median price target that implies an 8% downside.