To The Moon

Server and storage solution manufacturer Super Micro Computer, Inc. (NASDAQ: $SUPER MICRO COMPUTER INC(SMCI)$) – better known as "Supermicro" – has been having a rough time of late. In October last year, their long-time auditor Ernst & Young ended their association, stating that it no longer had confidence in management’s statements and no longer wanted to be associated with the financial reports prepared. The company reported a month later that it has now retained BDO USA as its auditor to stay compliant with listing requirements at Nasdaq. Ernst & Young's decision was preceded by the U.S. Department of Justice (DoJ) opening an investigation into the company following an exposé alleging "accounting manipulation" by now-defunct short-seller Hindenberg Research. The short-seller had contended that the company engaged in distribution channel stuffing by pushing products to distributors based on artificially inflated demand forecasts, undertook partial shipments to meet specific sales targets and inflated its total shipment count in the process, re-hired top executives responsible for "widespread accounting violations" that had resulted in a $17.5 million settlement with the SEC, and paid nearly a billion dollars over the past three years to non-arm's-length suppliers such as Ablecom and Compuware.

Despite a relatively swift transition of auditors, the company has been unable to file the  the Annual Report on Form 10-K for the period ended June 30, 2024 (the “2024 Form 10-K”) as well as the Quarterly Report on Form 10-Q for the period ended September 30, 2024 ("Q1 2025"). This past week should have seen the release of the Quarterly Report on Form 10-Q for the period ended December 31, 2024 (“Q2 2025”), which didn't happen. In its preliminary statement - which was again very light on figures and breakdowns - the company instead reiterated that it is adopting the recommendations issued by a "Special Committee" from among its Board of Directors that reviewed "internal controls" just before Ernst & Young resigned. 

The company has till the 25th of February to file all pending reports, failing which Nasdaq will likely move to delist the stock. As it is, the company's stock has already been removed from the tech-heavy Nasdaq-100 ($NASDAQ 100(NDX)$) in December and replaced by Palantir Technologies Inc. Given that the new auditor has been unable to process the two pending reports prior to the Q2 earnings release, it could be argued that the company might not be able to file. 

Issues With the Company?

The company’s principals largely dismissed hype around “accounting irregularities” as a “distraction”; instead it attributed challenges in revenue growth to delays in shipments of Nvidia’s next-generation Blackwell processors around which its server and storage solutions are built. The company’s “unofficial” release also revised the outlook for fiscal year 2025 to $23.5 to $25 billion, which is down from the previous forecast of $26 billion to $30 billion. In the preliminary reports made by the company to the public, quarterly revenue growth in Q2 2025 is lower than in the same period in the previous year as well as when compared relative to the meteoric growth seen in the previous quarter.

Source: Hunter Wolf Research; Chart Redesign by Leverage Shares

However, without the more detailed breakdowns typically prepared in the filed reports, nuances over the growth story can be considered by some to be cloudy. The language employed in the earnings call – which rang a little hollow in the wake of pending filings – hinted that the company is essentially loaded for bear for effective meeting of demand of liquid-cooled solutions: its U.S.-based facilities has a utilization rate of about 55%, its Taiwan facilities has a rate of about 60%, and its Malaysian facilities is currently at only 1%.

In the article analyzing the company's Q4 FY 2024 earnings release, a trend that was noted to have kicked off in FY 2023 was the ballooning expenditures on stock-based compensation (SBC). Given that the DoJ hasn't stated that it hasn't concluded its investigation satisfactorily and the company has begun to signal that it needs to find a new CFO along with other talent, there are arguably grounds for concern among investors with long-term horizons. 

In addition, early reports from November had indicated that Nvidia had already been active at work reshaping its AI supply chain by diverting orders away from the company predominantly in favour of Taiwan-based Original Design Manufacturers Gigabyte and ASRock. 

Despite Issues, Why is the Stock Rising?

Despite substantial falls in the stock's price during the opening of the DoJ investigation and the Ernst & Young exit, the stock's price has been rising particularly strongly after the failure to file the Q2 earnings report. The reasons for this newborn conviction are complex.

While it's entirely likely that the company's principals (which include the founders as well as their long-term associates) might face censure or be compelled to lighten their load by or shortly after the 25th of February, analysts remain quite bullish on the company itself. For instance, despite the lack of a proper Q2 earnings report, JPMorgan's analysts noted that the company "remains in a strong position in the AI server market with next-generation GPUs and broader technical capabilities encompassing areas like liquid cooling" while also noting that SEC compliance issues imply that there might be "challenges around working capital". 

Of particular concern would be the scenario wherein the company is unable to satisfy Nasdaq's requirements by the 25th. At first blush, this concern should be reflected in traded volume trends. 

 While the exit of Ernst & Young triggered the most pronounced change in daily traded volume, there have been a number of spikes in the wake of BDO's mandate, following which relatively small and temporary spikes in volumes have helped drive the stock's price in either direction. In the leadup to the Q2 earnings release, traded volumes spiked the price up. News of a continued failure to file a report in Q2 as well only served to temporarily dip the price but relatively small spikes in volumes have been holding the price aloft. 

The prevalence of the occasional heavy spike followed by substantial day-on-day drops throughout February seems to indicate periodic speculative activity, which is less likely to be retail investor activity (which tends to be fairly sustained across many days at the least) and more likely attributable to advanced market participants such as hedge funds and tactical players positioning themselves. Speculative activity by advanced market participants, however, doesn't necessarily mean high institutional conviction on the stock remaining tradable. A couple of longer-term strategic options that are somewhat logistically cumbersome to the average retail investor could also be on the cards.  

If Supermicro were to be delisted, the company might buy back its shares from current shareholders at a set price, which would be highly dependent on the company's cash reserves. The company had already announced a private placement of $700 million in new 2.25% convertible senior notes due in 2028 to support "rapid business growth immediately" in the hours leading up to its Q2 earnings call. Additional funding to execute the buyback might be available from the institutional space and potentially work out as being highly profitable. Buybacks of all issued shares would, however, be a complex process which advanced market participants typically tend to be more adept at or more willing to engage in than other classes of investors.   

Alternatively, the company might not do a buyback first, in which case the stock will be headed to the Over-the-Counter (OTC) market. Be it public or not and absent present concerns, the company is fairly well-regarded in the industry, which might mean that the stock can do some brisk business in the OTC market, which advanced participants are somewhat better equipped and more willing to navigate. While there would be fewer buyers and sellers – meaning that bid-ask spreads would be wider – it’s entirely possible that advanced participants would be in a better position to negotiate better terms by holding on to the stock - such as regular/special dividends, representation in the board, spinoffs of special units, et al. All in all, “buy and hold” investors might have to consider holding off and waiting till the 25th to see how this situation plays out before making a substantial investment decision.

Professional investors with access to European exchanges and a more tactical bent might find the leadup to the 25th of February a particularly interesting period to employ volume-driven trading strategies for profit-building. In that endeavour, the “2x Super Micro Computer ETP” (also with the ticker $2X LONG SUPER MICRO COMPUTER (SMCI) ETP(SMCI.UK)$ on London Stock Exchange) in the could be a very interesting instrument for the investor’s toolkit.

Investors have been piling into this instrument over the course of February and have earned spectacularly high returns. Of course, whether this continues is a consideration for that interested investors need to make.