To The Moon

$SUPER MICRO COMPUTER INC(SMCI)$ shares dropped over 33% on October 30, 2024, closing at $33.07 following the resignation of Ernst & Young LLP as the company’s auditor. This development follows previous warnings from short-sellers that raised concerns about SMCI’s financial transparency and governance practices. The auditor's resignation has compounded market anxieties, with heavy trading volume indicating a sell-off driven by uncertainty over potential financial risks and the market's declining confidence in SMCI’s internal controls.

Financial and Market Position

SMCI’s fundamentals, particularly a trailing PE ratio of 16 and forward PE ratio of 8, suggest it is trading at a significant discount relative to recent growth expectations. The company’s PEG ratio of 0.3 reflects robust earnings growth potential, which may attract value-focused investors amid this discount. However, the ongoing uncertainty raises questions about its fair valuation, especially given the auditor’s explicit concerns about integrity, which may imply material risks to earnings quality.

Trading Ideas for SMCI

For a more conservative approach to trading SMCI in light of its recent volatility, here are two alternative strategies that reduce direct exposure to SMCI's stock while allowing some participation in potential upside or continued decline:

1. Cash-Secured Put at $25 Strike Price

A cash-secured put strategy allows investors to generate income by selling a put option on SMCI with a strike price below the current trading level, such as $25. This conservative play benefits from option premiums and is ideal if you're comfortable owning SMCI at $25, a level significantly below the October 30 close of $33.07, should the stock be assigned.

Details of the Strategy:

• Strike Price: $25, for a conservative buffer below current prices.

• Premium: The premium collected provides an income buffer and reduces the effective entry price if the stock is assigned.

• Expiration: Opt for an expiration date 3–6 months out to give SMCI time to resolve uncertainties, yet limit the risk of rapid downside.

Outcome Scenarios:

• If SMCI stabilizes or rises: You keep the premium, providing a steady return without owning the stock.

• If SMCI declines further: You acquire SMCI at an effective price below the $25 strike, factoring in the premium received.

This strategy is suited for those interested in long-term exposure to SMCI at a steep discount but who want to wait for further market clarity before purchasing outright.

2. Covered Call Strategy on Existing SMCI Shares

For those already holding SMCI, selling covered calls allows for income generation while retaining the shares. This conservative approach provides some downside protection from option premiums, which offset losses if SMCI remains under pressure. Setting a call strike price slightly above current levels, such as $40, captures additional upside while benefiting from any premium if SMCI remains volatile.

Details of the Strategy:

• Strike Price: $40, just above the recent price range to allow some appreciation while capping upside.

• Expiration: Shorter-term expiration (e.g., 1–2 months) to frequently re-evaluate SMCI’s status and capture premium income with flexibility.

Outcome Scenarios:

• If SMCI remains stable or declines: You keep the premium and continue holding the shares, reducing your cost basis.

• If SMCI rallies past $40: You sell the shares at $40, achieving gains and capturing premiums but with capped upside.

These two strategies allow for conservative engagement with SMCI, managing downside risks while creating income potential.

Final Thoughts

SMCI’s market valuation reflects a high degree of skepticism, as the resignation has introduced a substantial overhang that may linger until clear, corrective steps are taken. Investors must weigh the trade-off between SMCI’s earnings growth potential and the uncertainty of its accounting practices, making any strategy high-risk.

Please DYODD.