Supermicro shares fell again. Time to buy a dip or stay away?

The saga is all around Super Micro Computer (SMKI -0.08%) Shares continued to fall on news of the auditor’s resignation. Stocks have been bouncing around like a ping pong ball this year, making a number of extreme moves both up and down. The stock is now down 9% year to date.

Let’s take a closer look at some of the recent stock drama and see if we can determine whether the stock is worth buying or whether it’s better to just stay away.

Questionable accounting allegations

Supermicro’s latest stock price decline comes as auditor Ernst and Young resigned, with the accounting firm saying it “does not wish to deal with financial statements prepared by management.” The company said her resignation follows recent information that came to its attention, although it raised concerns about Supermicro’s governance, transparency and internal controls in July.

For its part, Supermicro said it disagrees with Ernst and Young’s assessment and does not expect to have to make any adjustments to its financial statements. The company is currently looking for a replacement accounting firm to conduct the audit. This fiscal year was the first year that Ernst and Young audited the company.

Supermicro’s accounting first came into question in the public sphere back in August, when short seller Hindenburg Research accused the company of accounting manipulation, as well as sanctions evasion and management self-defense with related third parties. His accusations were intended to help drive down the stock price in his favor, which he succeeded in doing. A short sale is when an investor borrows shares from a current shareholder and then immediately sells them with the plan to buy them back later at a lower price.

Supermicro did itself no favors when, shortly after the brief, it decided to delay filing its fiscal 2024 annual report with the Securities and Exchange Commission (SEC) to review “the design and effectiveness of its internal control over financial reporting.” ” Wall Street JournalMeanwhile, it was later reported that the company’s accounting was allegedly being investigated by the Department of Justice (DOJ), which also caused Supermicro’s shares to fall.

It is noteworthy that Ernst and Young’s initial concerns predated the brief report on the Hindenburg. This is also not the first time the company has faced potential accounting issues. Back in 2020, the SEC fined Supermicro for prematurely recognizing revenue and underreporting expenses, noting that employees were encouraged to ship product to warehouses at the end of the quarter, after which it recognized revenue even though the product had not yet reached customers. CEO Charles Liang was fined $2.1 million but was not charged.

Buy the sauce or stay away?

Although Supermicro has not been found guilty of anything, the company has had many unsavory allegations brought against it and has a recent history of accounting manipulation. So investors need to be aware that this is quite a big risk.

At the same time, Supermicro is a real company that has benefited from artificial intelligence (AI) infrastructure construction. It designs and assembles servers and rack solutions for customers and has carved out a niche by being one of the first companies in the world to introduce direct liquid cooling (DLC) into its installations. AI-powered servers consume a lot of power and generate a lot of heat, so they need to be kept cool, and DLC proves to be a reliable solution.

Supermicro recently announced that it has deployed more than 100,000 graphics processing units (GPUs) with DLC solutions, and the company’s products generally receive good reviews. However, it is a low-margin business and the company faced margin pressure in its most recent fiscal fourth quarter, with gross margins falling to 11.2% from 17% a year ago. In comparison, chip manufacturers such as Nvidia And Broadcom bring gross profit of about 75%.

While I don’t think we’ve seen the last of Supermicro when it comes to it, and don’t think it’s a great business, I do think it has really benefited from the advancement of AI and that this will likely continue. . Meanwhile, the stock has become quite cheap given the growth opportunities ahead of it, even as it softened its quarterly results.

SMCI PE ratio (forward 1 year) data on YCharts

In general, risk-averse investors should stay away from the stock, which is what I personally would do. However, more risk-tolerant investors may consider taking a small position in the stock based on AI’s capabilities and valuation.

Jeffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has disclosure policy.