Super Micro (SMCI) experienced a significant stock decline exceeding 26% this week, highlighting the volatility surrounding the company. This drop raises questions for investors who are evaluating SMCI’s AI-driven growth potential against concerns about accounting practices, intensifying competition, and broader macroeconomic uncertainties.
This sharp decline partially offset gains from a three-week rally earlier in February, driven by the company’s optimistic long-term revenue projections and hopes that it would avoid delisting from the Nasdaq by submitting delayed filings to the SEC. Super Micro manufactures large-scale server racks utilizing Nvidia’s (NVDA) GPUs, crucial hardware for training and operating artificial intelligence models. The company benefited from the surge in AI-related stocks following the widespread adoption of AI technologies like ChatGPT.
Super Micro’s early entry into the AI server market, including a collaboration with Meta (META) on GPU servers for its AI Research SuperCluster prior to ChatGPT’s launch, positioned it as a leader in the field, according to Wedbush analyst Matthew Bryson. “Super Micro was the right company at the right time,” Bryson stated. “They were in the right product at the right time, and they turned that into a leadership position in AI servers.”
However, a Hindenburg Research report in August alleging accounting irregularities triggered a DOJ investigation and the resignation of Super Micro’s accountant. These events led to a significant stock decline of approximately 24% from the time of the accusations through the end of 2024. While the stock had recovered these losses by mid-February, this week’s downturn renewed investor concerns.
Super Micro submitted its delayed financial reports to the SEC on Wednesday. While the earnings results met expectations, the company acknowledged ongoing efforts to address “material weaknesses and deficiencies” in its internal financial reporting and disclosure controls. This is not the company’s first encounter with such issues; its former CFO faced SEC charges related to accounting violations in 2020. Bryson noted that these recurring financial concerns will likely continue to impact the company’s perceived risk profile.
Looking ahead, Bryson suggests that the company’s diminishing competitive advantage in the AI server market may be a more significant factor than its financial challenges. Increased reliance on Nvidia’s server designs limits differentiation among server manufacturers. Despite growing global demand for data center servers fueled by substantial investments in AI infrastructure, server makers face margin compression. “You’ve got this huge revenue ramp, but at the same time, what are the gross margins going to look like?” Bryson questioned.
Barclays analyst George Wang concurred, noting the limited appetite for significant multiple expansion given the lower-margin nature of the AI server business. Both Bryson and Wang maintain a Neutral rating on SMCI stock.
Macroeconomic uncertainty, a general market downturn, and a decline in Nvidia shares following its fourth-quarter earnings report further contributed to Super Micro’s stock decline this week. While Nvidia announced full-scale production of its Blackwell AI chips, used in Super Micro’s servers, concerns remain regarding potential performance issues and overheating problems with Blackwell-based server systems. Leverage Shares senior researcher Sandeep Rao emphasized the close relationship between Nvidia and Super Micro, stating, “If Nvidia is having trouble, that means SMCI is also having trouble… there is going to be volatility in SMCI as a stock.”
In conclusion, Super Micro’s recent stock plunge reflects a complex interplay of factors, including accounting concerns, competitive pressures, macroeconomic headwinds, and challenges faced by its key partner, Nvidia. The company’s future performance will depend on its ability to address these challenges and maintain its position in the rapidly evolving AI server market.
