The Latest Super Micro Computer Scandal Sinks the Stock. Is This a Buying Opportunity or Should Investors Stay Away?

Shares of Super Micro Computer (NASDAQ: SMCI) plunged this week after the company found itself in the midst of yet another scandal. The company has been a magnet for controversy over the years and has come under scrutiny from both short-sellers and government regulatory agencies alike.

The latest blow to the company comes after the U.S. Justice Department indicted three Supermicro employees, including one of its co-founders, for violating the Export Control Reform Act. The government has accused the employees of smuggling around $2.5 billion worth of servers with Nvidia graphics processing units (GPUs) to China. The U.S. has strict rules against sending its top chips to China to protect national security interests, and the three Supermicro employees went to great lengths to hide these sales.

Image source: The Motley Fool.

In 2024, short-seller Hindenburg Research accused Supermicro of accounting irregularities and raised concerns about potential export control violations. Supermicro had already been fined by the Securities and Exchange Commission (SEC) in 2020 for recognizing revenue early and understating expenses. Soon after the short report, the company delayed the filing of its 10-K annual report, which led to a long delay, and its auditor, Ernst and Young (E&Y), eventually resigned.

Auditors tend to be a conservative bunch, and at the time, E&Y made the unusual move of harshly criticizing Supermicro on its way out the door. The firm questioned Supermicro's governance, transparency, and internal controls, while saying it was "unwilling to be associated with the financial statements prepared by management." BDO eventually took over as auditor, and Supermicro filed its reports without restating past numbers, thus keeping an adverse opinion report active about its internal controls.

One of the most interesting things to come out of the DOJ investigation is that sales manager Ruei-Tsan "Steven" Chang apparently kept auditors from inspecting a Southeast Asian company's storage facilities that were supposed to be holding the servers, while in fact they were already in China. The trio also resorted to using dummy servers during visits from U.S. export control officers. Investors now understand E&Y's concerns more fully.

What should investors do?

Supermicro is a low-gross-margin middleman that designs and assembles servers and rack solutions for data centers. The company has struggled with gross margin pressure and has a history of accounting issues, and now several of its employees are accused by the government of illegally exporting Nvidia-equipped servers to China. There is no reason why Nvidia should keep doing business with a company with this history, nor is there a reason for investors to continue to own the stock.

As such, I'd stay far, far away.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.