Supermicro stock soars after review finds no evidence of fraud

Key points

• Supermicro stock surged almost 30% on Monday.

• The catalyst was news that an internal investigation found no misconduct.

• The AI stock has been on a rollercoaster ride this year.

Supermicro stock jumped almost 30% on Monday, making it one of the day’s top gainers.

Super Micro Computer (NASDAQ: SMCI) stock was one of the top gainers on Monday, as the stock price skyrocketed 29% to about $42 per share.

The catalyst for the server manufacturer, typically called Supermicro, was the news that it had not been involved in any fraud or misconduct following an investigation into its governance and controls.

The issues had caused Supermicro not to file its annual report for the fiscal year ended June 30 or its fiscal Q1 report for the period ended September 30. It also led to its outside auditor, Ernst & Young, resigning, and Nasdaq threatening to delist Supermicro from its exchange for not filing the reports.

However, the company, which makes AI-enabled servers for data centers, appears to be back on track following the satisfactory conclusion of an investigation.

No evidence of fraud or misconduct

Mainly, the earnings were delayed because Supermicro had appointed a special committee in August to investigate the governance issues that Ernst & Young (EY) brought to Supermicro’s audit committee back in July. The issue was compounded after EY resigned in October; replaced by a new outside accounting firm, BDO.

A couple of weeks ago, Supermicro stock jumped after it reported that it was finishing the investigation and had filed a plan to regain compliance and avoid being delisted.

On December 2, Supermicro released the final results of the investigation by the special committee. It found that there was “no evidence of fraud or misconduct on the part of management or the board of directors.”

Ultimately, the review determined that EY’s conclusions “were not supported by the facts examined in the review, the special committee’s interim findings reported to EY on October 2, 2024, or the special committee’s final findings.”

The investigation focused on several different areas. One was the rehiring of certain employees who resigned in 2018 following an investigation in 2017 by the audit committee. Another was the current sales and revenue recognition practices, particularly around quarter-ends. A third issue dealt with export control matters related to prevention of sales or diversion to restricted countries. Finally, there were concerns about related party disclosures.

Among the key findings, the special committee drew three main conclusions from its investigation.

One, the evidence reviewed by the special committee did not raise any substantial concerns about the integrity of Supermicro’s senior management or audit committee, or their commitment to ensuring that the company’s financial statements are materially accurate.

Two, the audit committee demonstrated appropriate independence and generally provided proper oversight relating to financial reporting. The special committee also had no reservations about the independence of the audit committee and each of its members.

Three, with respect to the rehiring of former employees, the tone at the top of the company was appropriate and fully consistent with a commitment to proper financial reporting and legal compliance.

Supermicro to hire new CFO

The special committee made several recommendations to strengthen Supermicro’s governance, including appointing a new CFO and creating a chief accounting officer position. The chief accounting officer will create an additional layer of accounting standards and oversight.

The committee also advised the company to appoint a separate chief compliance officer, a general counsel and more attorneys. The number of in-house attorneys should be appropriate for a company of Supermicro’s size and complexity.

It also called for Supermicro to improve its training systems and guardrail monitoring practices, and establish processes to review them.  

The board accepted all of the recommendations. Currently, it is searching for a new CFO to replace David Weigand, who will serve until a successor is named.

Further, Kenneth Cheung, Supermicro’s current corporate comptroller, was appointed chief accounting officer. Additionally, the board is accelerating the search for a chief compliance officer and general counsel.

In addition, the company said it has filed a plan with Nasdaq to complete its overdue annual and quarterly reports. It plans to “become current with its periodic reports within the discretionary period available to the Nasdaq staff to grant.” This will keep the stock listed on the Nasdaq.

Stock goes jumps 29%

Supermicro stock had been in freefall, dropping some 85% to a low of $17 per share in mid-November, post the October 1 10-for-one stock split. The fall was due for the most part to these issues.

Since November 15, the stock has jumped back to $42 per share, including a 29% surge on Monday. It is currently up 48% YTD.

The P/E ratio sunk from 79 in March down to 16 now, making this AI stock extremely attractive.

As an AI stock whose servers facilitate high performance computing at data centers, Supermicro has been compared to NVIDIA. It has incredible earnings power, and now its valuation is too low to ignore. However, investors should still be cautious until the missing earnings reports are released. They will provide a more detailed view of the company’s finances.