Amid Super Micro Computer's Accounting Challenges, Investors Should Never Forget This Investing Lesson

In This Article:

The resignation of Ernst & Young (EY) as Super Micro Computer's (NASDAQ: SMCI) accounting firm sent its stock reeling. Not only did its stock plunge but now investors must also contend with one of the more promising tech growth stories getting derailed by alleged accounting irregularities.

Considering this challenge, Supermicro has instead become a painful investing lesson. Unfortunately for investors, there's only one way to mitigate the potential consequences of such issues.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free ?

What happened?

EY's resignation forces even Supermicro bulls to look at the stock in a negative light. In July, EY expressed concerns regarding its internal controls over financial reporting, questioning whether it had sufficient controls, governance, and transparency. Now, after receiving "additional information," it has decided to resign.

In its resignation letter, EY said:

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 and to be unwilling to be associated with the financial statements prepared by management.

Supermicro immediately expressed disagreement with EY's decision to resign. Nonetheless, it has still not released its delayed annual report, and the resignation is a major setback in the company's quest to win investors' trust.

Indeed, the extent of Supermicro's accounting challenges remains unknown. However, the high level of uncertainty makes it nearly impossible to treat Supermicro stock as an investment under such conditions. Hence, shareholders who bought this AI stock for anything other than a speculative play should get out now. If you keep your shares, make sure you'll be able to absorb any possible loss.

The investing lesson

Unfortunately, the incident has given investors a painful reminder of a critical investing lesson: Diversification is the only tool investors have to protect themselves from a company's accounting issues.

Ultimately, one can only rely on company reports and filings to understand a company's financials. They also have to act on faith that regulations and accounting audits will protect the integrity of the reports.

In this case, it was also difficult for investors to predict this challenge. Most signs pointed to Supermicro's growth story being plausible, and I am one of the shareholders who believed it. The growth of Nvidia's AI chip business appeared to corroborate Supermicro's explosive growth, as it is one of its key partners. Although the AI growth opportunity could still be accurate, the extent to which the company actually capitalized on it and how that is reflected in its financial statements remains in question.