$SUPER MICRO COMPUTER INC(SMCI)$
I wouldn't recommend buying Super Micro Computer right now, even though the stock has dropped over 50% in the past year. I know in value investing these is good opportunity, so in this article, we're going to dive into the risks and potential rewards of this company.
Normally, I add a disclaimer at the end of my articles not to buy a stock just because someone talks about it, but Super Micro Computer is a company that I think carries significant risks, and it's important to fully understand those before making any purchase decisions. Keep that in mind as you watch this video, and if you enjoy it, be sure to like and subscribe for more content like this.
In addition to Super Micro. I’m particularly excited about Palantir right now, as they’re set to announce earnings on Monday. I’m a little cautious because a lot of the growth seems priced in, so even if they report strong numbers, the stock might still fall. If that happens significantly.
Another company I’m closely watching is Microsoft. After a weak 2024 and some downward movement following their earnings report, if the stock continues to drop, I might look to build on that position in my portfolio.
Now, back to Super Micro Computer—this stock is highly volatile and carries a lot of risk, so it’s important to understand those risks before considering a purchase. At one point in 2024, the stock was around $120 per share, but it has since dropped by nearly 90% to around $18 per share. It's rebounded slightly, up 60%, but it’s still down over 50% in the past year. Most of this drop is due to concerns that Super Micro might be delisted from the NASDAQ.
In August 2024, an activist investor from Hindenburg Research revealed a short position on Super Micro and accused the company of accounting manipulation. This sparked a significant decline, especially when the company’s auditor, Ernst & Young, resigned in October. This resignation caused the stock to plunge by more than 60% in just a few weeks. So, from a bullish perspective, the timeline here is critical, given the allegations and the auditor's departure.
This situation puts significant pressure on Ernst & Young, and their best course of action is to resign as the company's auditor, which is exactly what they did. While this decision certainly created more challenges for Super Micro Computer, it also placed Ernst & Young in a difficult position, as they now seem to be distancing themselves from the issue. Whether or not any wrongdoing occurred, the bear case is clear: it suggests that the company might be manipulating its accounting practices to make its financials appear stronger than they actually are. If Super Micro were indeed engaging in such manipulation, it would be a serious issue and could further harm the company's reputation.
The bear case argues that, at face value, Super Micro could be involved in illegal activities, justifying the decline in its stock price. However, it’s important to consider other perspectives, as Super Micro conducted its own internal investigation and found no evidence of misconduct. Here's the statement they released regarding the findings of the special committee's investigation:
“The special committee has completed its investigation based on a set of initial concerns raised by Ernst & Young. Following a three-month investigation led by independent counsel, the committee found that the audit committee acted independently and there is no evidence of fraud or misconduct on the part of management or the board of directors. The committee is recommending a series of remedial actions to strengthen internal governance and oversight functions, one of which is the replacement of the CFO, David Wagan.”
Currently, Wagan's picture remains on Super Micro's website, and his LinkedIn profile still lists him as CFO. The bear case here is that the company isn't acting fast enough on these recommendations, while the bull case suggests that replacing a high-level position like the CFO takes time. Personally, I think Super Micro is moving too slowly. They should have taken immediate action to let go of their CFO and moved forward with the necessary steps. The lack of updates about replacing the CFO or starting the process of finding a new one is concerning.
The only plausible reason for not letting go of their CFO yet could be that the company is focused on avoiding delisting. They need to file the required paperwork with the SEC by February 25th to stay listed, and they’ve already appointed a new auditor, BDO, to oversee their financials, which is a step in the right direction. However, they have a very tight window to get all the necessary filings in place.
Unfortunately, this is not the first time Super Micro has faced such challenges. In 2018, the company was delisted from the NASDAQ following an SEC investigation into its revenue reconciliation practices. This led to a two-year battle with the SEC, which ended in the company being relisted.
If Super Micro were to be delisted again, it would likely trade over-the-counter (OTC), which could result in higher transaction fees, lower market liquidity, and less regulation. While you could still hold the stock if you have a major brokerage account, many investors shy away from OTC companies, and the stock price would likely take another hit.
On the positive side, Super Micro has seen impressive growth in recent years. Over the past year, the company’s revenue has surged by 143% year-over-year, reaching nearly $15 billion.
Super Micro Computer's bottom-line numbers are growing rapidly as well. Over the trailing 12 months, their EPS has reached $2 per share, a 62% year-over-year increase. In the previous quarter, EPS saw a massive 340% year-over-year jump. This impressive growth is driven by the services Super Micro provides to data centers, regardless of whether the chips being used are from AMD, Nvidia, or Intel. If you believe companies like AMD and Nvidia will perform well over the next two to three years, it’s likely that Super Micro will continue to see growth as well.
This expected growth is reflected in analyst estimates for the coming years, with EPS forecasted to be $2.78 in 2025, up from $2.21 in 2024, and $3.69 in 2026. Despite this expected growth, the company is currently trading at a very low valuation. The forward P/E ratio is around 8.4, making it an attractive investment based on its low-risk-to-reward potential. This is why I own shares in Super Micro; the company's valuation is extremely low, presenting a significant upside opportunity.
Based on my estimates, Super Micro is currently trading at a forward P/E ratio of about 10.26, but I believe it should be trading between 20 and 30, which would put its stock price in the range of $55 to $83 per share. This would represent an upside of 95% to 190%. However, we should get feedback soon on whether the company will file with the SEC. I plan to wait until the end of February to see if they follow through with the filing. If they don’t, I’ll likely sell out of my position unless they come up with a definitive plan and timeline for filing.
If Super Micro does file and the stock price doubles, As the risk-to-reward ratio at that point wouldn’t be as appealing. If the stock moves up by 25% to 75%.
That said, you should be cautious about buying Super Micro Computer. There are significant risks involved, and given my long investment horizon, Keep in mind that investing in SMCI this is more of a short-term gamble on whether the company can stay listed on the NASDAQ. Don't take the risk unless you're comfortable with it, and make sure it fits within your risk tolerance.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub
Comments
Yes totally agree with you 💯