This AI Stock Is Down 50%, but Feb. 11 Could Be the Turning Point

Artificial intelligence has been the driving force behind the stock market's performance over the past few years. ChatGPT's launch in November 2022 ignited a tremendous bull market that is still going strong.

Although AI has been around for years, the AI chatbot showcased the practical applications of AI in everyday life. It led to heightened investor interest and supercharged investment in AI technologies.

One stock outshone all others. Between ChatGPT's release and its high-point almost exactly one year ago, Super Micro Computer (SMCI) rocketed to the forefront of the AI market with gains of 1,120%. In comparison, and despite all the headline-grabbing, Nvidia (NVDA) had only gained 324%. 

But a lot has changed since then and Supermicro, as it is known, is a shell of its former self. SMCI stock is down 50% after a noted short-seller accused it of accounting manipulation, it hasn't filed financial reports with the SEC in months, and the Nasdaq exchange is threatening it with a delisting. 

With Super Micro Computer promising to provide an update on its business on Feb. 11 and its valuation extremely depressed, would now be a good time to buy in?

A Sales Juggernaut

Supermicro makes servers and full rack scale solutions needed in AI data centers. All of the leading, high-end AI accelerators are built into its equipment.

In the last quarterly report it filed last May, the AI equipment maker reported sales had tripled to $3.85 billion while profits more than quadrupled to $402 million. To put that in perspective, it made more in revenue in one quarter than it had generated for the entire year in 2021.

Top-Tier Customers

While Supermicro's customer list isn't disclosed, it has been suggested all the top hyperscalers, including Amazon (AMZN), Apple (AAPL), Meta Platforms (META), and Microsoft (MSFT) use the server maker's equipment.

Its solutions have been so popular because it uses AI chips from all the leading providers. Supermicro is reportedly responsible for purchasing 10% of Nvidia's GB200 Blackwell accelerators.

Its runway for growth should be wide and long. There is a data center build-out underway that shows no signs of relenting.

A Bright Future

Analysts from McKinsey & Co. say data center capacity could rise 19% to 22% annually from 2023 to 2030, with 70% of the demand coming from data centers equipped to host advanced-AI workloads.

AI capital expenditures are exploding, too. Microsoft says it will spend $80 billion this year while Meta says it will spend $60 billion to $65 billion, including for a data center “so large it would cover a significant part of Manhattan.” 

As a leading supplier of servers and rack scale solutions for them, Supermicro seems a natural to secure a large percentage of the spending on equipment.

Very Dark Clouds Overhead

However, last August Hindenburg Research released a scathing report on Supermicro alleging it manipulated its accounting and was engaged in channel stuffing to meet its numbers.

The report also detailed Supermicro's spotted history with similar charges and settlement's with the SEC, as well as numerous allegations of related-party transactions. 

Former executives that had been with SMCI when the company was sanctioned were reportedly quickly rehired and outside personnel that had been brought in were let go.

Hindenburg calls Super Micro Computer a "serial recidivist" and it led to the tech stock not filing its annual report and subsequently its first quarter 10Q filing. Then its auditor quit and and independent committee launched a review of its accounting practices.

Because of the missed filing deadlines, the Nasdaq has threatened to delist SMCI stock from the exchange if it doesn't come up with a plan to submit its paperwork.

A Ray Of Hope?

The independent committee completed its work in December and said it found no accounting fraud or misconduct. Supermicro said it did not anticipate having to make any changes to its financial reports from prior filings.

Also, the Nasdaq gave Supermicro until Feb. 25 to get its annual and quarterly reports filed and the company says it should meet the deadline.

It also plans to provide the market with an update on its second-quarter business on Feb. 11 after the market's close. There is a lot of anticipation heading into that date as a robust report could supercharge its stock once again.

The Verdict

I'm anticipating momentum moving in Super Micro Computer's direction. The demand for data center equipment has been unrelenting and promises to keep growing. AI as a driving force has not lost any of its fire.

As a leading provider of data center equipment, Supermicro is primed to benefit. Yet because it is very risky to buy into a company before there is any clarity in its position, I'm staying on the sidelines. It's just too early to know. 

A more adventurous investor, however, might want to take a small position to capture potential upside, but with the knowledge it could go horribly wrong.

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