With shares down 70% over the past six months, Super microcomputer (NASDAQ:SMCI) is in free fall. As revenues and profits continue to break records, the good news has been eclipsed by uncertainty about the company’s internal controls.

These problems came to a head with the recent resignation of Supermicro’s auditor, Ernst & Young, citing his refusal to be associated with the company’s financial statements. Let’s dig deeper to see what this crisis could mean for shareholders over the next year and beyond.

The short sellers may be right.

Short seller organizations can be easy to hate because of their selfish business model and conflicts of interest. Typically, these groups will hold a position in the companies they criticize, allowing them to profit significantly from the bad press, even if it isn’t true. But in some cases, they call attention to issues that other investors have overlooked.

In late August, Hindenburg Research released a scathing report claiming that Super Micro Computer had engaged in accounting manipulation, proprietary trading and sanctions evasion related to Russia’s invasion of Ukraine. These claims sparked a storm. And although management denied them, it also delayed filing its annual report to assess what it calls “internal controls over financial reporting” – a bad sign.

In late September, the U.S. Department of Justice opened an investigation into Supermicro for possible accounting violations. And this month, the company’s auditor, Ernst & Young, resigned after months of disagreement with management over its governance and internal controls. These developments suggest that Hindenburg’s claims about Supermicro’s poor accounting practices may have some truth.

Investors should also pay attention to other Hindenburg claims, such as sanctions evasion or self-dealing, which could result in fines from the Securities and Exchange Commission (SEC) or other legal sanctions depending on the severity of the conclusions of the investigation.

What will next year bring?

Where there is smoke, there can be fire. And over the coming years, investors should expect more bad news related to Supermicro’s accounting and internal controls.

Analysts at Mizuho the fear that the absence of an auditor (and possible difficulties in obtaining a new one) could lead to removal from the list of Nasdaq exchange. This could significantly reduce Supermicro’s liquidity by forcing it to trade on the countera designation that could make shares more difficult to access, which could hurt the company’s valuation.

Image source: Getty Images.

However, while investors should take Supermicro’s financial reports with a grain of salt, its core business remains strong. Its fourth-quarter fiscal 2024 revenue jumped 143% year-on-year to $5.3 billion, amid strong demand for its liquid cooling systems and data center computer servers , which transform artificial intelligence chips created by Nvidia and others in ready-to-use form.

The company’s results also remain resilient, with net profit up 82% to $353 million. in the period.

Cheap for a reason?

Despite its impressive revenue and bottom line growth, Supermicro trades for a Before multiple price/profit (C/B) of just 10, which is incredibly low considering its triple-digit growth. For context, the S&P500 has a forward estimate of 25, while AI hardware leader Nvidia trades for a forward P/E of 36.

Super Micro Computer faces enormous uncertainty over the quality of its accounting and other internal controls, so the share price discount appears to more than reflect the potential risk. While it’s too early to buy the stock, investors shouldn’t be surprised if the company experiences a recovery when more information becomes available.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Nvidia. The Motley Fool has a disclosure policy.