Actions of Super microcomputer (SMCI -3.77%) fell again after the company provided investors with an update on its first-quarter fiscal results, as well as its current audit and filing process. Supermicro was a big winner to start the year, with its stock quadrupling in the first three months of 2024. However, its shares are now solidly in negative territory year-to-date after this latest decline.

Let’s take a closer look at Supermicro’s latest successes and consider what investors should do with the stock.

Income well below expectations

In an update to investors, Supermicro said it now expects its first-quarter sales to be between $5.9 billion and $6.0 billion. Previous forecasts called for revenue between $6 billion and $7 billion. While this is clearly a disappointment, it’s worth noting that last year the company generated $2.1 billion in revenue. So even with reduced expectations, revenue will have nearly tripled year over year.

Supermicro now expects adjusted earnings per share (EPS) to be in a range of $0.75 to $0.76, down from its previous forecast range of $0.67 to $0. $83. That would be an increase from $0.34 a year ago, taking into account the prior 10-for-1 stock split.

Gross marginswhich were a big problem for the company last quarter when they fell to 11.2%, from 15.5% in the fiscal third quarter and 17% a year ago, are expected to rise to 13.3%. This is a sequential improvement that brings it closer to its more historical range of 15% to 17%. However, this is a low margin business. Chip companies like Nvidia And Broadcom have gross margins closer to 75%.

Looking ahead to its fiscal second quarter, Supermicro expects revenue between $5.5 billion and $6.1 billion, with adjusted EPS between $0.56 and $0.65. A year ago, the company reported second-quarter revenue of $3.66 billion and adjusted EPS of $0.56.

Regarding its accounting, Supermicro said the special committee it formed found no evidence of fraud by management, but that it will issue corrective actions to help the company strengthen its internal governance and oversight functions. However, the company is unable to determine when it will file its 10-K annual report, which was due on August 29.

As the company is currently unable to file its annual report, the stock risks being delisted by the Nasdaq. The exchange sent Supermicro a letter of non-compliance on September 17 and it has 60 days to file or submit a plan to restore compliance. Right now, it appears the stock is in serious danger of being delisted, since the company currently doesn’t even have an auditor following Ernst and Young’s recent resignation.

Supermicro was previously delisted in 2019 after being unable to file its annual report in a timely manner due to accounting issues, before being relisted in 2020. If its shares were to be delisted again, the stock would then be traded over the counter (OTC). walk. A delisting could also mean the stock would be kicked off the market. S&P500which he has just joined.

Image source: Getty Images.

What to do with Supermicro stock?

Supermicro is a real company that has benefited greatly from the artificial intelligence (AI) infrastructure boom. However, many questions currently remain regarding its accounting, with its auditor having resigned and the SEC previously finding the company guilty of saturated the channel.

Aside from potential accounting issues, the major risk for the company is that the shadow cast over it leads customers to look to do business elsewhere. While benefiting from the development of AI infrastructure, it is a low-margin sector with high competition.

According to a report from DigiTimes AsiaNvidia stepped in and took orders away from Supermicro given the cloud surrounding the company. If suppliers and customers decide to do less business with Supermicro, it will likely affect the company far more in the long run than a government fine.

While investors might consider taking notice of the stock given its degraded state, I think it’s best to stay away given all the uncertainty and risks surrounding the stock. There are simply better ways to develop AI infrastructure.