One of the most profound disappointments of the recent Super Micro Computer (SMCI -1.56%) earnings report came from an unexpected source. The disappointment did not 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.
Instead, 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 would delay the release of its 10-K for the fourth quarter of fiscal 2024 (ended June 30).
The stock fell 19% in the trading session following that delay. Even though it has regained some of that lost value, it leaves investors questioning whether they should continue to invest in the Super Micro growth story or stay away.
Making sense of the accounting issues
Admittedly, the gut reaction of dumping stock in this type of situation makes sense from a certain point of view. Such actions leave investors wondering about the extent of any restatements Super Micro makes. As of now, nobody knows whether any possible restatements will be relatively meaningless, or whether they will radically change Super Micro’s investment thesis.
Indeed, this is difficult for me on a personal level. Considering its growth rate and potential for more growth, it became one of my favorite AI stocks. Hence, I bought shares when it became available at a more reasonable valuation.
Nonetheless, just days after I bought Super Micro stock, I am now compelled to question my own investing call and advise risk-averse investors to pass on Super Micro.
Additionally, the incident serves as a reminder of one critical reason why investing experts encourage diversification. Whenever shareholders invest in an individual stock, they face a remote but real possibility that the company has reported inaccurate numbers.
This does not mean investors should assume that Super Micro is the next Enron, or even that the delayed filing will uncover inaccuracies. However, diversifying does limit the damage investors can face from a potential 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 can also make a case for buying Super Micro right now, assuming they can tolerate the risk.
The most obvious benefit 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 means 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 is likely genuine. After all, its partner Nvidia continues to report triple-digit revenue growth, primarily because of the popularity of its AI chips — which often go into Super Micro’s servers.
That growth will probably continue. 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 in the AI realm, the company should continue to exceed that growth rate for years to come.
Should I still invest in Super Micro stock?
At current levels, Super Micro stock looks like a buy — if you can handle the risk.
Admittedly, the uncertainty surrounding Super Micro’s filings should keep risk-averse investors out of the stock. More risk-tolerant investors should also avoid large Super Micro bets until it releases the delayed 10-K.
However, Super Micro stock sells at a very cheap valuation, and the industry growth trends driving the stock are not in doubt. Assuming the company can move on from this uncertainty, its stock could surge significantly higher from current levels.
Will Healy has positions in Super Micro Computer. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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