SMCI in Freefall — Delays, Exposés, and Stock Splits

It’s been a heck of a week for Super Micro Computer Inc (NASDAQ: SMCI).

Let’s start at the beginning. On August 25, early in the trading day, activist investing group Hindenburg Research released a report detailing alleged irregularities with SMCI’s governance and financial practices, as well as accounting issues and purported undisclosed transactions.

If you’re not familiar with their work, Hindenburg Research has exposed several high-profile corporate scandals, including fraud at Nikola Corp (NASDAQ: NKLA), misleading practices at Clover Health (NASDAQ: CLOV), and allegations against Adani Group, all while profiting from short-selling the targeted companies. 

Hindenburg Research reports often lead to significant stock price declines as they reveal unethical practices or financial mismanagement. Hindenburg’s aggressive approach has made them one of the most feared names in activist short-selling.

These are all allegations as of right now — however, a day later, on August 26, SMCI announced that it would delay the filing of its Form 10-K with the SEC, an annual report that provides a comprehensive overview of a company’s financial performance and risks.

Unsurprisingly, the markets reacted harshly. SMCI is up +64.48% compared to this time last year, and +47.02% YTD — however, since the announcement, the stock has taken a nosedive, shedding -37.05% of its price. To make matters even more volatile, a 10:1 stock split has been announced for October.

Chart courtesy TradingView

Let’s make one thing clear — a Hindenburg exposé is not a death sentence, and some companies have managed to weather the storm, clear up the revealed issues, and move on.

The question is whether or not that is the case with SMCI. Though the company has struggled with slipping profit margins and earnings misses, sales are increasing at an incredible pace. If the report doesn’t pan out, or if the issues in it are fixable, SMCI could become a very affordable growth stock.

Up to now, the stock’s earnings have grown at 66.34% per year — outpacing the market average of 23.83% and the US computer Hardware Industry average of 15.53%. Likewise, revenue has grown by 26.65% annually — faster than the market’s 11.22% average and the industry’s 14.93% average.

In tandem with this, SMCI is generating higher Return on Assets (19%) than the US Computer Hardware industry average (11.82%), and the company has gotten more efficient at generating Return on Capital (16.26%) compared to 3 years ago (7.83%).

But ultimately, the name of the game here is caution. SMCI might be a buying opportunity if the issues highlighted by Hindenburg Research turn out to be fixable or unintentional. But it’s too soon to tell. 

Our recommendation? Add the stock to your watchlist and keep your ear to the ground. Things can go one of two ways. Either the allegations are true, and you should stay away from SMCI, or things pan out a little differently — in which case, it might be worth giving the stock a second look.

—> Click here to do your own research SMCI — and don’t forget to add it to your watchlist

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