Super microcomputer (SMCI 11.62%) Shareholders have been through a whirlwind of late. Although the stock is up 1,480% over the past two years, it has also fallen more than 70% from its all-time high over the past eight months. As one of Nvidiathe largest partners, the server manufacturer should benefit from the demand for artificial intelligence (AI) infrastructure is increasing, but Supermicro has also been accused of accounting manipulation.

Among the 12 analysts who follow the company, the median 12-month price target of $30.50 per share implies an 8% downside from the current stock price of $33. That means six analysts think the stock will fall more than 8% over the next year. Additionally, 19 analysts followed Supermicro three months ago, meaning seven recently discontinued coverage. Wall Street is clearly turning away from the company.

Here are the important details.

The Bull’s Case: Supermicro is a leading AI server provider

Super Micro Computer builds servers, including complete server racks equipped with storage and networking, that provide customers with a turnkey solution for data center infrastructure. Its in-house manufacturing capabilities and “modular” approach to product development allow it to bring new technologies to market faster than competitors, often within two to six months.

Indeed, earlier this year, Rosenblatt analyst Hans Mosesmann wrote: “Super Micro has developed a model that is very, very quick to market. They usually have the broadest product portfolio when a new product comes out. » These advantages have helped Supermicro secure a leading position in AI servers, a market expected to grow 30% annually through 2033, according to Statista.

Importantly, Supermicro is also the leading supplier of direct liquid cooling (DLC) systems, which could help the company strengthen its position in the AI ​​server space. DLC systems reduce data center energy consumption by 40% and takes up 80% less space than traditional air-cooled systems. AI servers generate more heat than general-purpose servers, so demand for DLC systems is expected to increase rapidly.

Indeed, while less than 1% of data centers have historically used liquid cooling, Supermicro estimates that 15% (and perhaps as many as 30%) of new data center installations will use liquid cooling over the next few years. next two years, and the company says that is the case. positioned to “capture the majority share of this growth”.

Image source: Getty Images.

The case of the bear: Supermicro is plagued by problems

As mentioned, while Supermicro shares are up 1,480% over the past two years, the stock has also plunged more than 70% from its record high over the past eight months. Below is a month-by-month timeline detailing the events that led to this rapid decline in value.

• August 2024: Short seller Hindenburg Research has released a report accusing Supermicro of accounting violations, including improper revenue recognition, undisclosed related party transactions and sanctions evasion. Subsequently, Supermicro delayed the filing of its Form 10-K For financial year 2024but CEO Charles Liang said the Hindenburg report contained “false or inaccurate statements.”
• September 2024: The Wall Street Journal reported that Supermicro was under investigation by the Justice Department after a former employee filed a lawsuit accusing the company of accounting violations, some of which were mentioned in the Hindenburg report. Supermicro also received a letter of non-compliance from the Nasdaq Stock Exchangesaying it had 60 days to file its 10-K or submit a plan to restore compliance.
• October 2024: Supermicro’s auditor, Ernst & Young, has resigned. “We are resigning due to information recently brought to our attention that has caused us to no longer be able to rely on the representations of management and the audit committee,” the company wrote in its resignation letter. Ernst & Young also said it “does not wish to be associated with the financial statements prepared by management.”
• November 2024: Supermicro delayed its Form 10-Q for the first quarter of fiscal 2025. But the company hired BDO as a new auditor and submitted a compliance plan to Nasdaq before the deadline, saying it would be current in its files in a timely manner. Now Nasdaq must approve or reject this plan.

The situation is even more complicated than what I just described because Supermicro has been accused of similar accounting violations in the past. At that time, the company filed its Form 10-K for fiscal 2017 nearly two years late and was fined $17.5 million by the court. Securities and Exchange Commission (SEC). Supermicro was also delisted from the Nasdaq for about 18 months, although shares still gained 73% during that time.

Investors should avoid Supermicro stock for now

Supermicro’s stock could soar if the wrongdoing Hindenburg described turns out to be inaccurate and nothing comes of the Justice Department’s investigation. But investors should be at least a little skeptical, given that the SEC has fined the company for similar violations in the past, and Hindenburg claims Supermicro rehired three senior employees involved in the previous scandal.

In this context, I think potential investors should avoid this stock for the time being. There are simply too many unknowns to make an informed decision, which is likely why seven out of 19 Wall Street analysts have halted coverage in the past three months. This may also explain why the remaining 12 analysts have the stock priced at a midpoint. price target this implies a drop of 8%.