Why Is SuperMicro’s Stock (SMCI) Continuing To Drop?

If you hadn't checked on Super Micro Computer's stock price (NASDAQ: SMCI) in a while, you could be forgiven for taking a sharp breath in surprise, with the stock having fallen 42% in two trading sessions, and trading down another 4.5% in the pre-market. For a company that had delivered amazing gains over the last couple of years, the turnaround has been rather shocking, so let's take a look at some of the cause and effect.

Once considered a shining star, the company had experienced remarkable growth leading in to this year. Investors had witnessed a jaw-dropping surge of over 800% in Supermicro's stock value in the 18 month period starting last year, a performance that managed to outstrip even Nvidia's formidable returns.

The first three months of 2024 saw gains of more than 300%, so for the stock to now be in position where it looks set to open today's session red on a YTD basis would surprise many.

However, the second half of this year has cast a series of shadows over Supermicro. Challenges began to emerge when Hindenburg Research, known for its aggressive short positions, released a report in August spotlighting alleged accounting discrepancies within the company—claims that Supermicro outright denied.

To add to the company's woes, EY, the respected auditing firm formerly known as Ernst & Young, resigned from its role as Supermicro's auditor in recent days. With EY citing concerns over internal financial controls and overall management in a very strongly worded resignation letter that is out of the ordinary, investors have been urged to proceed with caution.

The company's difficulties were compounded by the delayed filing of its 10-K annual report. Despite assurances from Supermicro that they did not expect significant changes to reported earnings, investor confidence wavered.

In response to the concerns raised by EY, Supermicro took steps, including the establishment of a special committee intended to review matters related to the auditor's concerns. Although the company has dealt with questions surrounding its accounting in the past, it still maintains potential within the AI server market and is seen as a leader in direct liquid cooling technology.

Despite these prospects, with the accumulation of pressing challenges—chiefly the inquiries into accounting practices and the uncertainty surrounding the audit—the stock's nosedive reflects the market's response to the heightened risk profile.

While Supermicro contends with these issues, the message for the time being is one of caution. Those looking for value may be tempted by the huge sell-off in the stock, and longer term trying to forecast where this one is headed could prove to be a fools game.

Buy when other's are fearful has long been a mantra on the markets, but the sentiment here has been notably bearish since the 52 week highs set in March. The fall from that point has been more than 75%, and only time and a commitment to transparency will likely shift sentiment. The indication from the street at this stage seems to be one that is very hands off, and until the company can show that it's corporate governance practices are in line, there could be further bumps in the road.