Results from Super Micro Computer Inc (NASDAQ:SMCI) are due on Wednesday but the performance of the server manufacturers and Nvidia's third-largest customer is likely to "take a back seat" to other concerns, analysts say.
Shares in Super Micro lost over 45% of their value last week after Ernst and Young resigned as its auditor, taking the decline in the shares to almost 70% over six months, following a Wall Street Journal report about the launch of a Department of Justice investigation, a warning in September that it would be late in filing its annual result, and a weaker-than-expected quarterly earnings in August.
"We believe questions around EY's decision, SMCI's ability to file its 10K, and a reported DOJ investigation will take precedence over SMCI's quarterly report and guide," said Wedbush analyst Matt Bryson.
One of the key questions, is whether the company can prevent delisting, he said. As of September 17, the company had 60 days to submit to the Nasdaq a working plan to regain compliance by filing its F2024 10K.
Assuming the exchange approves the plan, it could grant the comaby up to 180 days from the original August 29th deadline to file its F2024 10K.
In EY's resignation, it cited an inability "to rely on management's and the audit committee's representations" that left it "unwilling to be associated with the financial statements prepared by management".
With Super Micro lacking an auditor and given the "negative cloud" created by EY's decision to resign, Bryson said it "arguably appears to be an uphill battle for SMCI to remain listed at this point".
This raises a second question, the analyst said, of whether there is a more significant problem with financials and/or management behavior.
"Last time SMCI encountered accounting issues, changes were not material in our view with only small portions of revenue being reallocated between quarters (the larger issue being the delisting)."
The company said last month in a filing that it "does not currently expect" that resolving any of the matters raised by EY or under consideration by the special committee will result in its quarterly results for the fiscal year to June 2024 needing to be restated.
While this suggests there is no problem with the financials, EY's decision to resign and the reported DOJ investigation, "we believe investors need to account for the risk a larger problem might exist", the Wedbush analyst added.
That leaves the final question of whether Super Micro can meet quarterly expectations and maintain its 2024 sales outlook.
"Before this latest set of issues surfaced, we had encountered some signs SMCI liquid cooling requirements were not as robust as the company might have previously anticipated," said Bryson, noting commentary from supplier Nidec in its earnings call suggesting quarterly revenues were below initial expectations and that the larger ramp up in production is likely in the first calendar quarter of 2025, suggesting perhaps second-half sales of liquid-cooled servers aren't as robust as might have been anticipated.
"And we have had mixed feedback regarding whether concerns around SMCI late filing and/or the reported DOJ investigation might be impacting customer's decisions.
"But net, given the above, we are more cautious around SMCI's ability to meet/exceed [fiscal first quarter] expectations or guide to consensus for [fiscal second quarter]."
Wedbush still kept its 'neutral' rating on the stock, but reducing its target price to $32 from $62, based on a lower price-earnings multiple than the company has averaged over the past five years, but above the mid-single digit PE that SMCI was valued at prior to its AI related surge in business.