Super Micro Computer Faces Stock Drop as Auditor Exit Sparks Accounting Concerns Amid AI Growth Potential

The Ongoing Accounting Controversy

The recent drop in Super Micro’s stock price was triggered by EY’s decision to step down as its auditor. According to the auditing giant, EY was “not willing to be associated with the financial statements prepared by management,” noting additional concerns after previously highlighting issues with Super Micro’s internal controls and transparency in July.

Super Micro quickly responded, disagreeing with EY’s assessment and stating that it does not plan to restate its financial reports. The company is actively seeking a replacement auditing firm, as this is the first year EY handled Super Micro’s auditing.

However, EY’s concerns align with previous allegations made by short-seller Hindenburg Research in August, which accused Super Micro of accounting irregularities, sanctions evasion, and self-dealing with third parties. Hindenburg’s short-selling strategy—which profits from declining stock prices—contributed to the stock’s downward pressure as well. Compounding the issue, Super Micro opted to delay filing its fiscal 2024 annual report, citing a review of its internal controls in financial reporting—a decision that raised eyebrows in the investment community.

A report by The Wall Street Journal indicated that the U.S. Department of Justice (DOJ) may also be investigating Super Micro’s accounting practices, adding to the uncertainty.

Super Micro’s AI Infrastructure Opportunity

Despite the accounting drama, Super Micro’s business focuses on AI infrastructure, where it has carved a notable niche. The company designs and assembles servers and rack solutions, with a unique focus on integrating direct liquid cooling (DLC) technology. This cooling approach is becoming essential as AI-driven servers demand significant energy and cooling solutions to maintain efficiency.

Super Micro recently announced that it has deployed over 100,000 GPUs using DLC solutions, and the company’s products are generally well-regarded within the tech industry. However, Super Micro operates in a low-margin sector, facing pressure to maintain profitability. In its latest financial quarter, Q4 FY2024, the company reported that its gross margin fell from 17% to 11.2% year-over-year, a significant drop compared to chipmakers like NVIDIA and Broadcom, which see gross margins around 75%.

To Buy the Dip or Not?

While Super Micro’s stock may look attractive for value investors, especially as AI infrastructure demand rises, risk-averse investors might want to steer clear due to the unresolved allegations and volatile stock performance. For those with a higher risk tolerance, however, Super Micro’s competitive position in the growing AI sector and its recent dip could offer an intriguing entry point.