To The Moon

$SUPER MICRO COMPUTER INC(SMCI)$

Yesterday, the market was down for the majority of stocks in the S&P 500. However, the semiconductor sector, particularly Super Micro Computer Inc. (SMCI), has faced significant challenges recently.

Clash! Clash! Clash!

SMCI's stock has fallen 74% over the past six months and continues to slide, down another 11% 14 Nov 2024 in premarket trading around the $18 mark.

To understand the situation, let’s review the events that have led to this consistent downturn. In August, Hindenburg Research released a report after taking a large short position on SMCI, alleging evidence of accounting irregularities, undisclosed related-party transactions, and control issues. Then, in September, the Department of Justice reportedly opened a probe into SMCI, adding to the company’s challenges.

In October, things worsened as SMCI’s auditor, Ernst & Young, resigned, citing significant concerns about internal controls, board independence, and accounting practices. Additionally, SMCI delayed its 2024 financial report filing, which further impacted investor confidence. Ernst & Young’s resignation letter raised serious doubts about SMCI's financial statements, causing further unease.

De-listing 16 Nov 2024?

Into November, SMCI has continued to experience daily stock declines. The company announced it has no timeline for releasing its annual accounts and reported weak preliminary Q1 2025 results. Concerns about a potential delisting from the NASDAQ have also emerged, as SMCI faces a critical deadline of November 16 to either file its delayed report or submit a compliance plan.

The company’s board has claimed there was no evidence of fraud or misconduct, but this hasn’t reassured investors. Insider ownership remains relatively high at 18%, but recent insider sales and federal scrutiny add to the overall concern.

What happen if smci delisting?

If Super Micro Computers (SMCI) were to be delisted from the NASDAQ, it would likely have several significant consequences for the company and its shareholders. SMCI shares would no longer be traded on a major exchange like NASDAQ, which could lead to reduced liquidity. Shares would likely move to over-the-counter (OTC) markets, which have fewer buyers and sellers, resulting in less efficient price discovery and potentially wider bid-ask spreads. This reduced liquidity makes it more challenging for shareholders to buy and sell the stock easily.

Lower Visibility and Institutional Interest

Many institutional investors, including mutual funds and ETFs, have restrictions against holding stocks that aren’t listed on major exchanges. Delisting would likely mean that institutional investors would have to sell their holdings in SMCI, which could put additional downward pressure on the stock price. It could also reduce the company's visibility in the market and limit its ability to attract new investors.

Potential for Further Price Decline

Delisting often results in an immediate drop in share price, as institutional investors and others liquidate their positions. Additionally, stocks traded on OTC markets are often perceived as riskier and may be associated with speculative or distressed companies, leading to a further discount in valuation.

Increased Difficulty in Raising Capital

Delisting could make it more challenging for SMCI to raise capital in the future. Without the credibility and visibility provided by a major exchange listing, potential lenders or investors may view the company as riskier. This could increase borrowing costs or limit SMCI’s ability to attract new capital for growth or restructuring.

Regulatory Implications and Investor Concerns

A delisting might also raise concerns about SMCI’s compliance with regulatory requirements and internal controls, as the move to OTC can sometimes coincide with increased scrutiny or ongoing regulatory issues. Investors may question the company’s governance, transparency, and overall financial health.

Long-Term Business Impact

While delisting is primarily a market-related event, it could also impact SMCI’s business operations. Some customers, suppliers, or partners may view delisting as a sign of instability, which could affect relationships, especially if confidence in the company is undermined.

Valuation and Potential Upside

Despite the issues, SMCI’s valuation metrics remain attractive, especially relative to industry averages, with a forward P/E of around 6 (significantly below the sector average of 25).

Hypothetical DCF analysis suggests a possible intrinsic value of $53 per share, representing a nearly 200% upside from current levels if SMCI’s financials are accurate. However, these metrics are subject to skepticism given the recent financial reporting issues.

Institutional and Insider Activity

Insider ownership stands around 15%, but significant sales occurred earlier this year. Institutional ownership is around 54%, and recent quarters have shown more sells than buy, some institutional still confidence in the company’s longer-term potential despite recent volatility.

Outlook

Currently, analysts have mixed ratings: Quant suggests a "strong sell," while Seeking Alpha and Wall Street have SMCI as a "hold." Despite SMCI trading at a significant discount compared to its sector peers and showing strong growth projections, these numbers are questionable given the unresolved issues.

Final Take

While SMCI’s low valuation and projected earnings growth could make it attractive, ongoing accounting concerns, DOJ investigations, auditor resignation, and delayed filings are substantial red flags. These concerns overshadow potential upside, making SMCI a high-risk investment until there is more clarity on its financials and regulatory standing.