Supermicro’s problems aren’t tech buyers’ problems – yet

Server equipment maker Supermicro has found itself in hot water, and its stock is getting hammered. But so far, the scandal hasn’t translated into product issues. The problem is on the accounting side, which may or may not eventually impact the product side of the house.

Supermicro joined the AI revolution early and went hard. While HPE, Dell, and Lenovo were doing add-in boards for AI accelerators, Supermicro was selling dedicated GPU servers. Needless to say, it has a strong, close relationship with Nvidia. Early on the AI bandwagon, Supermicro saw its stock climb in March to 52-week high of $122 per share (adjusted to reflect its 10-for-1 stock split in October).

But there’s a backstory. In 2017, the company underwent an internal audit that resulted in multiple executives leaving the company, including CFO Howard Hideshima. Then in 2020, the U.S. Securities and Exchange Commission charged Supermicro and Hideshima with several accounting violations. Supermicro and Hideshima neither admitted to nor denied the allegations but settled with the SEC, and both parties paid hefty fines.

The controversy reignited in August when Hindenburg Research, an activist short seller, released a report that made allegations of continued misconduct. Among the claims was the assertion that Supermicro is continuing its questionable accounting practices and had rehired several key executives who had left in 2017.

Granted, the claims of an activist short seller – whose interest aligns with a decrease in stock value – should be taken with a grain of salt.

But, the day after the Hindenburg Research report was released, Supermicro announced the delay of a required SEC filing, and shortly thereafter, the Department of Justice launched a probe into the company. Details on the probe are not forthcoming, but a DOJ probe is cause for concern.

Then came the real hard blow. On Oct. 29, the accounting firm of Ernst & Young announced it is severing its relationship with Supermicro, stating it could “no longer be able to rely on management’s and the Audit Committee’s representations” and that it wouldn’t be able to do its job in accordance with “applicable law or professional obligations.”

Now the company really has a problem. To lose a relationship with a respected accounting firm is a bad look.

Still, Supermicro is innocent until proven guilty. And while an investigation can be distracting, it will impact the finance department more so than product development. Supermicro is still making a premium product, and there are no questions surrounding that.

There is also the potential for this to spill over onto Nvidia, since Nvidia is so closely connected to the company. But for Nvidia, the issue is peripheral at best. Nvidia’s stock may take a glancing hit for Supermicro’s fuzzy accounting practices, but it will recover quickly.

And I’m not betting against Supermicro, either. It has been delisted from the stock exchange before, weathered the 2017 and 2020 scandals, and survived a potentially devastating accusations of spying on customers in 2018. Despite a major stock drop this year and calls for the CEO to step down to restore confidence in the company, Supermicro is a survivor.

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