Super Micro Addresses 'Accounting Fraud' Allegations, Cites Weaknesses in Financial Disclosure Controls

TradingKey - Super Micro Computer (SMCI.US), a prominent AI server manufacturer, recently revealed significant weaknesses in its financial disclosure controls (like internal audits and compliance checks), which could compromise the accuracy and timeliness of its financial reporting if not corrected.

The company pointed out these deficiencies in its annual report filed with the U.S. Securities and Exchange Commission (SEC), noting that as of June 30, its disclosure controls and procedures were deemed ineffective due to these issues.

The backdrop to this disclosure is a major accounting scandal that hit Super Micro last October, when its stock plummeted over 30% in one day. This was sparked by Ernst & Young's resignation as the company's auditor, citing concerns over financial controls, governance, and integrity. Subsequently, Super Micro had to issue necessary financial statements.

Allegations of "accounting fraud" have been brewing for some time. In August of last year, two months before Ernst & Young's resignation, short-seller Hindenburg Research accused Super Micro of "apparent accounting issues, undisclosed related-party transactions, sanctions and export control failures, and customer problems," pointing to "obvious accounting red flags." This accusation led to an intraday stock drop of 8.7%.

Prior to the financial scandal, Super Micro’s stock had surged fourfold earlier last year, reaching a peak of $122.9, driven by the AI boom and increased demand for its products. The company, known for high-performance servers, counts major AI players like Nvidia, AMD, and Intel among its clients.

This year, sustained interest in AI technology has helped the company's stock recover from approximately $30 at the start of the year to a high of $66.44. However, their fourth-quarter report released on August 5 fell short of expectations, with both revenue and profit missing the mark, and significantly lowered guidance for the next quarter, resulting in a post-market drop of over 16%.

Super Micro has begun implementing corrective measures to address these deficiencies but cautions that it cannot guarantee their ongoing effectiveness or the absence of future control issues. The company had already proposed a series of measures to bolster financial controls in a March filing.

Analysts remain divided on the stock. Mizuho Securities maintains a "hold" rating, expressing caution over growth prospects due to competition from other server manufacturers like Dell and Hewlett Packard Enterprise, and raises the target price to $50. JPMorgan also maintains a "hold" rating but lowers the target price to $45, while Citi reduces it to $48. Goldman Sachs continues to recommend a "sell" rating.

As of the pre-market session on August 29, Super Micro Computer's stock had fallen 1.18% to $43.45.