The Rise and Fall of Super Micro Computer

On November 25th, Super Micro Computer (NASDAQ: SMCI) staged a remarkable rally in the US stock market, with its share price soaring by a staggering 15.87%, and its market capitalization thus climbing to a hefty $22.4 billion. And just last week, the company had already witnessed an eye-catching weekly gain of 80%. So, what on earth was going on behind the scenes?

 

The origin of the crisis dates back to August this year when the well-known short-selling institution Hindenburg Research questioned Super Micro Computer's financial issues. Subsequently, Super Micro Computer announced that it needed to postpone the submission of its annual report.

 

In October, the company's auditing firm, Ernst & Young LLP, announced its resignation, further exacerbating the problem. Ernst & Young stated that it had concerns about Super Micro Computer's governance and transparency. On November 13th, the company postponed the quarterly financial report for the period ending September 30, 2024, again, and admitted that the report for the first quarter of fiscal year 2025 might also be delayed.

 

Judging from past experience, the resignation of an auditor/accountant is a very serious matter, and the possibility of the stock facing the "worst outcome" of suspension or delisting is increasing.

 

Once Super Micro Computer is delisted by NASDAQ, the company may also face the early repayment of bonds worth up to $1.725 billion. According to the provisions of the bond documents, if the company is delisted, investors holding Super Micro Computer's convertible bonds due in March 2029, with a value of $1.725 billion, will have the right to choose to recover their funds in advance. Nevertheless, some Wall Street investors have spotted arbitrage opportunities. They believe that once Super Micro Computer is delisted, the company's convertible bonds may be repurchased at par value.

In terms of stock price, from August to November 14th, it had cumulatively dropped by more than 70%. The market capitalization had evaporated by over $55 billion.

 

On November 18th, local time in the United States, Super Micro Computer announced that its Board of Directors' Audit Committee had hired BDO USA (Lixin Accounting Firm's US branch) as an independent auditor, effective immediately. Super Micro Computer stated that BDO is one of the world's top five accounting firms, with a global network of over 115,000 professionals, and is recognized as a leader in auditing and assurance.

 

BDO thus became the "white knight" for Super Micro Computer.

 

Moreover, Super Micro Computer also announced that it had submitted a compliance plan to the NASDAQ Stock Market to support its request for an extension of time to regain compliance with NASDAQ's continued listing requirements. In the compliance plan, Super Micro Computer stated that it would be able to submit the annual report for the period ending June 30th as well as the quarterly report for the period ending September 30th. And during NASDAQ's "review of the compliance plan", Super Micro Computer will continue to be listed on NASDAQ.

If Super Micro Computer's plan is accepted by the exchange, the new deadline for its filings may be postponed until February.

 

With this combination of measures, Super Micro Computer's stock price immediately rebounded. Since November 18th, the stock price has rebounded by nearly 80%.

However, although Super Micro Computer has found a new auditor, BDO, it remains uncertain whether BDO can complete the audit as scheduled and issue a compliance opinion, and whether the 10-K annual report can be submitted on time. Whether Super Micro Computer can successfully overcome the difficulties and regain market trust remains to be seen.

In the short term, Super Micro Computer's stock price has now risen above the 5-day moving average and the 10-day moving average, indicating a trend of continued strengthening in the short term. These two short-term moving averages, at $28.39 and $35.00 respectively, also provide certain support for the stock price.

Here, I would suggest that if investors do not hold the stock, they should still remain on the sidelines for the time being, as this market situation is rather extreme.