One among the profound disappointments of the recent Super Micro Computer (NASDAQ: SMCI) earnings report came from an unexpected source. The frustration didn’t come from the earnings release itself. That showed that the massive growth earned from selling servers containing Nvidia‘s artificial intelligence (AI) chips had continued.
As a substitute, it began when short-seller research company Hindenburg Research released a report alleging accounting irregularities with Super Micro. Soon after, Super Micro announced that it’d delay the discharge of its 10-K for the fourth quarter of fiscal 2024 (ended June 30).
The stock fell 19% inside the trading session following that delay. Even though it has regained just a few of that lost value, it leaves investors questioning whether or not they need to proceed to take a position inside the Super Micro growth story or stay away.
Making sense of the accounting issues
Admittedly, the gut response of dumping stock within the type of situation is smart from a certain standpoint. Such actions leave investors wondering in regards to the extent of any restatements Super Micro makes. As of now, nobody knows whether any possible restatements will probably be relatively meaningless, or whether or not they’ll seriously change Super Micro’s investment thesis.
Indeed, that’s difficult for me on a personal level. Considering its growth rate and potential for more growth, it became considered one in all my favorite AI stocks. Hence, I purchased shares when it became available at a more reasonable valuation.
Nonetheless, just days after I purchased Super Micro stock, I’m now compelled to question my very own investing call and advise risk-averse investors to pass on Super Micro.
Furthermore, the incident serves as a reminder of 1 critical reason why investing experts encourage diversification. At any time when shareholders spend money on an individual stock, they face a distant but real possibility that the company has reported inaccurate numbers.
This doesn’t mean investors should assume that Super Micro is the next Enron, and even that the delayed filing will uncover inaccuracies. Nevertheless, diversifying does limit the damage investors can face from a possible accounting irregularity at one company, making it a safeguard all investors should consider.
The case for staying with Super Micro
When incorporating such protections, investors may make a case for purchasing Super Micro right away, assuming they are going to tolerate the danger.
Probably essentially the most obvious profit is the lower stock price. At around $385 per share as of this writing, it sells at a 68% discount from the $1,229 per share peak it set five months ago.
It also sells at a price-to-earnings (P/E) ratio of 19. Assuming the fiscal Q4 figures stand when Super Micro finally releases the 10-K, the 82% increase in net income from year-ago levels implies that’s a low multiple, considering its massive growth rate.
Moreover, despite the questions surrounding the upcoming 10-K report, Super Micro’s rapid growth might be going real. Despite every little thing, its partner Nvidia continues to report triple-digit revenue growth, primarily resulting from the recognition of its AI chips — which often go into Super Micro’s servers.
That growth will probably proceed. Allied Market Research predicts a compound annual growth rate of 38% for the AI chip industry through 2032. In fiscal Q4, Super Micro reported 143% revenue growth, far ahead of the expected industry growth. Considering Super Micro’s critical support role inside the AI realm, the company should proceed to exceed that growth rate for years to return.
Should I still spend money on Super Micro stock?
At current levels, Super Micro stock looks like a buy — in case you possibly can handle the danger.
Admittedly, the uncertainty surrounding Super Micro’s filings should keep risk-averse investors out of the stock. More risk-tolerant investors also must avoid large Super Micro bets until it releases the delayed 10-K.
Nevertheless, Super Micro stock sells at a very low-cost valuation, and the industry growth trends driving the stock aren’t doubtful. Assuming the company can move on from this uncertainty, its stock could surge significantly higher from current levels.
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Will Healy has positions in Super Micro Computer. The Motley Idiot has positions in and recommends Nvidia. The Motley Idiot has a disclosure policy.
Does Super Micro Computer’s Delayed Filing Change Its Investment Thesis? was originally published by The Motley Idiot