Supermicro, a manufacturer of server equipment, is currently facing significant challenges, resulting in a sharp decline in its stock value. However, this scandal has yet to affect its product offerings. The issues primarily revolve around accounting discrepancies, which could potentially have repercussions for its product line in the future.
Supermicro was quick to engage with the AI boom, positioning itself ahead of competitors like HPE, Dell, and Lenovo, who were focused on add-in boards for AI accelerators. Instead, Supermicro opted to market dedicated GPU servers, forging a strong partnership with Nvidia in the process. This proactive stance led to a notable rise in its stock price, reaching a peak of $122 per share in March, adjusted for its 10-for-1 stock split that took place in October.
However, there is a complicated history behind these developments. In 2017, Supermicro conducted an internal audit that resulted in the departure of several executives, including CFO Howard Hideshima. The situation escalated in 2020 when the U.S. Securities and Exchange Commission filed charges against Supermicro and Hideshima for various accounting violations. Both parties denied any wrongdoing but reached a settlement with the SEC, incurring substantial fines.
The issue resurfaced in August when Hindenburg Research, an activist short seller, published a report containing allegations of ongoing misconduct. The report claimed that Supermicro has continued to engage in questionable accounting practices and had brought back several former executives who had left the company in 2017.
Of course, one must approach the assertions of an activist short seller – whose motivations align with a decline in stock prices – with caution.
However, following the release of the Hindenburg Research report, Supermicro made headlines by postponing an essential SEC filing. Soon after, the Department of Justice initiated an investigation into the company. While specific details regarding the investigation remain scarce, the involvement of the DOJ certainly raises alarms.
Then, the situation worsened significantly. On October 29, Ernst & Young announced its decision to cut ties with Supermicro, expressing that it could “no longer be able to rely on management’s and the Audit Committee’s representations” and that it could not fulfill its duties in accordance with “applicable law or professional obligations.”
At this point, Supermicro faces a serious dilemma. Losing a partnership with a reputable accounting firm is undeniably detrimental.
Nonetheless, Supermicro remains presumed innocent until proven otherwise. While investigations can be disruptive, it is likely to affect the finance team more than the product development side. The company continues to deliver a high-quality product, and there are no doubts about that aspect.
There is also a chance that the situation could influence Nvidia, given their close ties to Supermicro. However, for Nvidia, the concern is minimal. Although Nvidia’s stock might experience a minor dip due to Supermicro’s questionable accounting practices, it is expected to bounce back swiftly.
I am also not overlooking Supermicro’s resilience. The company has previously faced delisting from the stock market, navigated through scandals in 2017 and 2020, and overcame serious allegations of spying on clients back in 2018. Despite a significant drop in stock value this year and suggestions for the CEO to resign to rebuild faith in the organization, Supermicro has proven to be a fighter.
