Super Micro Computer Stock Sinks on Smuggling Scandal. Is the Market Overreacting?

Shares of Super Micro Computer (NASDAQ: SMCI) have been crashing in recent days, on news that people connected to the company helped smuggle Nvidia's chips to China, getting around export restrictions in the process. As a result of the news, the stock has been in the midst of a sharp free fall. Within just the past week, it has crashed close to 30%.

This isn't the first time that the company has been in turmoil. In October 2024, its shares also crashed more than 30% after its auditor resigned and raised questions about the company's internal controls and accounting practices. Investors had doubts about the accuracy and reliability of its financials. It would take time, but the tech stock would end up recovering.

Is this a serious concern for investors, or could now be a good time to buy the stock on weakness? Here's what you need to know.

Image source: Getty Images.

Is Super Micro in trouble?

On March 19, three people were charged with conspiring to evade U.S. export law by shipping artificial intelligence (AI) technology to China, according to the Department of Justice. One of the people involved was Super Micro co-founder, Wally Liaw.

Technically, Super Micro was not charged, but investors are nonetheless concerned about the company's practices and procedures, which have come under the microscope yet again. Auditors raised issues about its controls in the past, with Ernst & Young resigning over a year ago, stating that it didn't want to be associated with Super Micro's financials.

Why I'd stay far away from the stock

Super Micro itself may not be in any trouble, at least not for now, anyway. But this just adds to the list of reasons to avoid the stock. While its growth rate has been impressive and it has benefited from surging demand for servers and AI infrastructure, its margins are also extremely thin; even with sales more than doubling, its earnings rose by a more modest rate of 25% in its most recent quarter.

Meanwhile, the idea that multiple people connected with the company had been able to smuggle products to China seems to corroborate that controls and procedures are lax, suggesting that its previous auditor was right to distance itself from the business. Super Micro's stock may have recovered from bad press in the past, but I don't think there's a reason to be optimistic that it will be able to bounce back nearly as easily this time around.

There's simply far too much risk around Super Micro these days to make it a tenable investment to hold on to, which is why I'd steer clear of it. There are, after all, many better AI stocks out there.

David Jagielski, CPA 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.