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Analysts update Super Micro stock price target after shocking disclosures
When we last left Super Micro Computer (SMCI) , the tech company had been given the heave-ho by its accounting firm.
The maker of liquid-cooled artificial-intelligence servers said in a regulatory filing that the firm, Ernst & Young, had resigned due to concerns about Super Micro's financial statements.
"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 Big 4 accounting firm said,
It concluded that "we can no longer provide the audit services in accordance with applicable law or professional obligations.”
EY expressed concern about the Super Micro’s board independence from Charles Liang, the company's co-founder, chairman, president and CEO, and other members of management.
The company had hired EY in March 2023 to do the audit of the fiscal year ended June 30.
Charles Liang, CEO of Super Micro Computer, during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024.
The investment firm said that not only did the accounting firm's action “raise considerable questions about the validity of Super Micro's current and past financial statements but it also raises significant questions about Super Micro's corporate governance and management's commitment to integrity and ethical values.”
Needham had initiated coverage of Super Micro on Sept. 18 with a price target of $600 a share.
Argus downgraded Super Micro to hold from buy in light of E&Y's resignation, a U.S. Justice Department investigation and the Hindenburg Research report.
The investment firm said that Super Micro was still growing its revenue faster than its peer group but has also said that gross margin was thinning.
EY's run for the exit followed a Wall Street Journal report of a U.S. Department of Justice investigation into Super Micro. The probe had been sparked by short-seller Hindenburg Research, which alleged "accounting manipulation" at the AI-server maker.
Hindenburg released a scathing report on Super Micro in August, saying that it had “found glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.”
After the Hindenburg report came out, Super Micro said in an Aug. 28 filing that its annual report, due on Aug. 29, would be delayed.
Super Micro had been delisted in 2018 for delays in filing financial reports. Regulators later charged the company for “widespread accounting violations,” including improperly reporting revenue, and fined it $17.5 million.
Nvidia moving Super Micro orders
The bad news got worse on Nov. 4 when DigiTimes Asia reported that AI-chip maker Nvidia (NVDA) had moved some of its Super Micro orders to other suppliers, including Taiwan-based Gigabyte and ASRock, which have secured contracts with major generative-AI computing supplier Coreweave.
Nvidia is seeking to maintain supply-chain stability for AI servers, the report said.
Wedbush analysts Matt Bryson and Antoine Legault lowered the investment firm's price target on Super Micro to $32 from $62 on Nov. 4 and kept a neutral rating on the shares.
The firm said that Super Micro's stock lost nearly half its value after the EY disclosure.
"We believe questions around EY’s decision, SMC's ability to file its 10K, and a reported DoJ investigation will take precedence over SMCI's quarterly report and guide," the analysts said in a research note.
As of Sept. 17, Super Micro had 60 days to provide Nasdaq with a working plan to restore the company to compliance by filing its 2024 SEC Form 10K.
If the plan is approved, Nasdaq could grant Super Micro as much as 180 days from the original Aug. 29 deadline to file the 10K.
The Wedbush analysts said Super Micro was facing “an uphill battle” to stay listed in light of the “negative cloud” created by EY’s decision to resign as the company’s auditor.
The firm said given EY's decision to resign and reports of the DoJ investigation, “we believe investors need to account for the risk a larger problem might exist.”
The analysts said that before this latest set of issues surfaced, “we had encountered some signs (that) SMCI liquid cooling requirements were not as robust as the company might have previously anticipated.”
"And we had mixed feedback regarding whether concerns about SMCI late filing and/or the reported DoJ investigation might be impacting the customer's decisions," Bryson and Legault said.
Even if SMCI does manage to resolve its current problems, Wedbush said there is limited room for systems differentiation, “meaning competition will only continue to lift overtime, weighing further on gross margins and leverage.”
Super Micro shares fall and Dell's rise
As Super Micro’s shares tumbled, Dell’s (DELL) stock was climbing.
“While we aren’t here to speculate as to what Super Micro may or may not be doing with its financials — we do think a tipping point has been reached after speaking to some industry contacts,” wrote Melius Research analysts Ben Reitzes and Jack Adair. They have a buy rating and a $140 price target on Dell, according to Barrons.
“Make no mistake, Super Micro isn’t just Dell’s competitor — it’s ‘the’ competitor for AI servers," the analysts said.
The analysts said the AI-server category Dell works in is on track to grow more than 20% over the next few years. They added that "if Dell’s backlog soars by a few extra billions at some point over the next 12 to 18 months – it sure won’t be nothing.”
Troubles at Super Micro are likely going to help Dell in terms of orders and sales, benefiting results at some point next year, they argued.
