The Paradox of Super Micro

A few AI meme stocks are turning back to reality. I thought Intel was in a bad situation, compared to Super Micro.

CEO of Super Micro.

As you can imagine I’m following AI related stocks like crazy. But a little stub on this story has to be told.

In an era of AI boom stocks and meme stocks, SMCI 0.00%↑ is among the weirder stories. Nvidia’s market cap has grossly overvalued a wide range of AI and semi related stocks, but what’s going on with Super Micro?

The stock is down already another 20% premarket today post elections on November 6th, 2024.

Super Micro, a server maker, reported preliminary first-quarter results on Tuesday. To say that the company is facing several challenges related to its corporate governance is a very kind way to put it. Ernst & Young LLP resigned as their auditor and the trouble just seems to continue.

The stock will be down around 23% YTD today when markets open. They cut their guidance for the fiscal first and second quarters, even as it said an internal probe found no evidence of fraud from management or directors following concerns raised by its auditor. Something doesn’t sound right here.

After a remarkable rise of 246% last year, the stock has recently faced a downturn, losing almost 80% of its value during an AI boom? Dell that also makes servers is up nearly 80% so far this year. DELL 0.00%↑

As much as Palantir PLTR 0.00%↑ has turned into a meme stock Super Micro is coming back down to slightly more realistic values.

Super Micro said its board of directors found there was no evidence of fraud or misconduct from management after its auditor resigned last week. It makes you almost want to read the Hindenburg short thesis yet again.

They announced:

The Company expects to report the following financial information for the quarter ended September 30, 2024:

• Net sales in a range of $5.9 billion to $6.0 billion compared to its previous guidance range of $6.0 billion to $7.0 billion

• GAAP and non-GAAP gross margin of approximately 13.3%

• GAAP diluted net income per common share in the range of $0.68 to $0.70 compared to its previous guidance range of $0.60 to $0.77

• Non-GAAP diluted net income per common share of $0.75 to $0.76 compared to its previous guidance range of $0.67 to $0.83

Since they are late in releasing annual financials and at risk of being delisted by the Nasdaq, the above is reported unaudited quarterly results on Tuesday. That’s super sketchy. The company among other things, faces accusations from an activist of accounting irregularities and that it’s shipped sensitive chips to sanctioned nations and companies, violating export controls.

Seema what do you have for me?

On a call with analysts on Tuesday, the company said it wouldn’t discuss any questions related to Ernst & Young’s decision to resign and didn’t address corporate governance issues. That’s yet another huge red flag.

Their price today will basically return them to June, 2023 levels. They claimed to have Positive free cash flow of $365 million for the quarter back in late August. The company also said it expects net sales of $5.5 billion to $6.1 billion for the second quarter, compared with analysts' estimates of $6.86 billion, according to data compiled by LSEG. That’s a major earnings miss. It’s not audited so who knows, it could actually be worse.

The company is expanding its production facilities globally, including a new campus in Malaysia, to increase manufacturing capacity and support future growth but there’s a lot of uncertainty about their corporate conduct.