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After enjoying the value-boosting benefits of the AI hype, right alongside Nvidia (Nasdaq: NVDA) and other semiconductor stocks, Super Micro Computer (Nasdaq: SMCI) completely reverted to its December 2023 price level. Trading at $27.32 per share at the time of writing, SMCI stock shows 3% returns over a one year period, having dropped by 55% over the last three months.

Should investors see this as a rare opportunity? After all, Softbank CEO Masayoshi Son stated last Tuesday that “Nvidia is undervalued because the future is much bigger.” Can Super Micro Computer still play a role in this larger AI future that needs server solutions?

Timeline Recap of SMCI’s Fall from Grace

Troubles for the server solutions firm began with a Q2 earnings report ending June, delivered in early August. It not only failed to exceed the $0.80 earnings per share (EPS) estimate but failed at a considerable negative surprise of 21.25%, delivering $0.63 EPS instead.

The same month, on August 28th, SMCI delayed its 10-K annual report for fiscal year 2024, stating “unreasonable effort or expense” for a timely filing. A day earlier, Hindenburg Research group published its scathing report, alleging “improper revenue recognition”, nepotism and US sanctions avoidance.

At the end of September, the Department of Justice (DoJ) initiated a probe into SMCI based on these allegations. Last week on October 30th, the company disclosed that a respectable accounting firm Ernst & Young (EY) resigned as the company’s auditor due to being “unwilling to be associated with the financial statements prepared by management.”

How to Assess Super Micro Computer at This Point?

From the all-time high of $118.81 in March 2024, SMCI stock hit a 52-week low of $25.02 on Monday, but is currently priced at $27.32 per share. Investors are now asking themselves to what extent are revenue figures massaged, if any?

In early September’s letter, just after the Hindenburg Research report, CEO and founder of the company, Charles Liang, attempted to assuage shareholders and customers by noting that SMCI had a successful year that will carry on into 2025.

“As we look ahead to 2025, we are closing out a historic year with winning products, a record number of orders, a strong and growing backlog of design wins and leading market positions across a number of areas.”

If accounting irregularities are taken at face value, as indicated by the departure of the EY auditor and Hindenburg allegations, it is then a question by how much? Although it is currently pointless to cite the company’s earning figures to make an investing case, it remains a fact that SMCI deals in hardware server solutions.

As such, even if the accounting books are cooked, they should be on the lower end of the spectrum. In other words, such irregularities may be offset by the growth of the AI infrastructure sector, where SMCI has an established market position as a datacenter server provider.

Moreover, it is fair to say that SMCI didn’t conjure its new lineup of liquid-cooled superclusters, which are in high demand due to their effective tackling of heat produced by high AI workloads. According to Mordor Intelligence, data center liquid cooling market forecast is estimated to track a CAGR of 23.31% between 2024 and 2029.

The data center market itself is poised for a 22% CAGR as a midrange scenario between 2023 and 20230, according to McKinsey & Company. The bottom forecast is still significant at 19% CAGR while the upper-range scenario is at 27% CAGR.

As an established contributor to that growth, investors should view the SMCI price reset accordingly. 

What is the Reasonable Expected Correction Range?

In the 8-K form filing on September 27th, Super Micro Computer got an extension for its annual FY2024 financial statement to November 27th. At present, the company doesn’t expect any EY-raised issues to alter “any restatements of its quarterly reports for the fiscal year 2024 ending June 30, 2024, or for prior fiscal years.”

The implication is that SMCI stands behind its prior figures. In the aforementioned last quarter ending June, the company reported nearly double net sales, at $3.85 billion vs $2.18 billion in the year-ago quarter. This delivered a net income of $353 million vs $194 million for the same period. 

Likewise, the company’s cash reserves nearly tripled, from $440.9 million to $1.6 billion, if prior figures were to be believed. When similar allegations were put forward previously, worth three years of accounting figures, SMCI settled with the SEC in August 2020. The restated changes were in single-digit percentages. 

The net effects of Super Micro’s restatement. Image credit: Securities and Commission Exchange (SEC)

For the next round of corrections, SMCI’s newly established Special Committee is counting on Cooley LLP and Secretariat Advisors auditor to address EY/Hindenburg allegations and deliver findings. The very public EY resignation suggests that, this time around, misreported accounting is somewhat greater in scope.

What is Likely the Underlying Issue with SMCI?

Having supplied and advanced the server market for 30 years, it is likely that Super Micro is suffering from a case of nepotism as its core issue. Nearly all of its top leadership is in some way interconnected on a personal level.

While Liang and his wife Sara Liu are co-founders, Yih-Shyan (Wally) Liaw was forced to resign in January 2018 due to aforementioned regulatory and audit pressures. Wally returned in May 2021, having a stake in a 2CRSi Corporation that conducts business with Super Micro in the high-performance computing (HPC) market.

Close family members all work for Super Micro in some capacity and across the company’s subsidiaries, from Hung-Fan (Sara Liu’s brother) and Shao Fen Kao (Sara Liu’s sister-in-law) to Mien-Hsia (another Sara Liu’s sister-in-law). The brother of Charles Liang, Steve Liang, presides over Ablecom as CEO, which is Super Micro’s subsidiary. 

Likewise, another younger brother of Charles Liang, Bill Liang, is heading Compuware together with his brother Steve. Both he and his wife are Ablecom shareholders. Compuware itself is 15% owned by Ablecom, per Hindenburg data. Even the sibling of aforementioned Wally has a stake in Ablecom.

From this interconnectedness, it appears that purported misaccounting comes from sales to Ablecom and Compuware, who then might be selling gear back to Super Micro in a familial self-contained economy.

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