The only thing that can be assured about Super Micro Computer's (NASDAQ: SMCI) share price is that volatility will dominate the market for the foreseeable future. The second resignation of external auditors Ernst & Young in 18 months highlights risks first brought to light by former employee Bob Luong. The company’s results and demand for its products suggest the risks are limited, but uncertainties remain that will keep downward pressure on the stock price for the foreseeable future. The primary hurdle for the company today is regaining market trust, which won’t come easily.
Update:
Super Micro is now at risk of being delisted from the Nasdaq, and has until Nov. 16 to regain compliance with the stock exchange.
“We see higher delisting risk in the absence of an auditor and the potential challenge to getting a new one,” analysts at Mizuho, who have the equivalent of a hold rating on the stock, wrote in a report Wednesday.
The first step will be releasing the fiscal 2024 results. However, those may include negative factors, including financial manipulation, as evidenced by Ernst & Young’s departure. In the letter to the board, the firm stated unequivocally its unwillingness to be associated with financial statements prepared by Super Micro executives, damming evidence if circumstantial. In this scenario, the company must clean house, including board members and executives, or risk a persistent lack of market trust. As for executives, including CEO Charles Liang, they expect no material changes to the F2024 or other results.
Super Micro Computer's Business Is Solid; AI Spending Grows
There is no doubt that demand for Super Micro Devices products is strong. The results from Google (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT) attest to that fact, as do their plans to build new data centers. Those will be powered, to a large extent, by Super Micro Devices liquid-cooled servers, which reduce costs and improve efficiency for the data centers that use them. The latest news is the launch of next-generation products built on NVIDIA’s (NASDAQ: NVDA) Blackwell GPUs and CPUs. The first products are already being tested by end-users, with the production ramp slated for this quarter.
The analysts' forecasts for Q4 and F2025 are robust. Activity over the last month shows sentiment narrowing to a range centering on $6.45 billion in revenue for Q4. That’s a gain of over 200%, an acceleration from the prior quarter, supported by ramping sales of NVIDIA GPUs. NVIDIA’s last report showed that demand for the Grace Hopper was still strong and indicated an expectation for strength to be sustained until Blackwell was widely available. The outlook for 2025 is equally robust, although growth will slow. The takeaway is that revenue is expected to continue growing and provide significant leverage to earnings. Earnings growth is expected to double the pace of revenue.
Analysts Move to the Sidelines
The analysts' sentiment toward Super Micro Computer has dimmed over the last two months but remains favorable to the market. While sentiment slipped to Hold from Buy and the price target retreated from its peak, the move in the stock price has front-run the decline. Trading at $28.50, the stock is more than 10% below the analysts' lowest target, and the consensus forecasts a nearly 150% upside. The risk is that sentiment will continue to sour and may not recover despite the company’s position in the AI infrastructure industry.
Institutional investors are more optimistic. Their buying spiked in Q3 and sustained a bullish tilt in Q4. The institutions own about 85% of the stock and are a critical factor in the stock price future. With nearly 20% of the stock short in the last report and the number likely to grow due to the auditor quitting, the forces are in play for extreme volatility, including a short-squeeze. The catalyst for that will be a resolution of the accounting and F2024 report issues.
The price action in SMCI has retraced 100% of the 2024 rally and is now at an inflection point. If the market can not sustain support at this level, the price could fall to $25 or lower, with lower a very real possibility. Among the catalysts for that move is the potential for NASDAQ delisting. NASDAQ requires timely filing of reports, and the F2024 report is long overdue. NASDAQ also requires financial fail-safes, including independent auditors, which Super Micro Computers may find difficult to replace.
