This Is Why SMCI Stock Bounced Back, and Why It's Time to Buy

The artificial intelligence (AI) driven enthusiasm benefited Super Micro Computer, Inc. SMCI, better known as Supermicro. However, self-inflicted setbacks resulted in a sharp decline in share prices. Despite this, the SMCI stock rebounded strongly, becoming the top performer on the S&P 500 on Tuesday with a 31.2% increase. Does this turnaround prompt consideration about the right time to invest in the SMCI stock? Let’s see – 

What Plagued SMCI Stock?

In recent times, Supermicro faced a slew of discouraging news that dragged its share price down. In August, Hindenburg Research alleged that Supermicro was involved in accounting irregularities, and the bearish report had a devastating impact on the SMCI stock. The following day, things worsened after Supermicro declared that it would delay filing its annual 10-K report with the SEC. 

A few weeks later, the DOJ investigated Supermicro for accounting violations, while the Nasdaq issued a letter of non-compliance that threatened to delist the company from the tech-laden index. If delisted, the stock may trade over the counter, affecting trading volume. Adding to the woes, Supermicro’s auditor, Ernst & Young, resigned over financial reporting standard issues. Maybe there was a disagreement about accounting practices with management.

Lastly, in another regulatory filing, Supermicro declared that it would not submit its recent quarterly report, which raised the magnitude of the company’s dilemmas and prompted investors to sell SMCI stock. However, investors have begun to load up Supermicro’s shares from yesterday’s trading session.

Why Did SMCI Stock Rebound Yesterday?

Things are looking brighter for Supermicro’s investors, as the company hired an independent auditor—BDO, the fifth-biggest public accounting firm. BDO’s solid reputation is good news for Supermicro’s stakeholders as the company can file its annual 10-K report quickly and restore faith among market participants.

If the filing is done on time, Supermicro’s chances of being delisted from Nasdaq diminish. Supermicro is now better positioned to submit a compliance plan with the Nasdaq. Supermicro, anyhow, has a reputation for successfully settling issues related to accounting disclosures with the SEC. It did settle penalties issued by the SEC regarding accounting irregularities for fiscal years 2014 to 2017.

Moreover, BDO’s engagement suggests that Supermicro’s financials are more manageable than initially feared and that the independent auditor does have trust in management’s integrity. Otherwise, BDO wouldn’t have chosen to audit at this critical juncture. Drawing a parallel, Marvell Technology, Inc. MRVL faced a governance crisis in 2015 and its auditor left. However, Marvel engaged Deloitte and successfully restored compliance and regained investors’ confidence.

2 More Reasons to be Bullish on Super Micro Computer

Supermicro has a scalable business. After all, Supermicro’s business is intertangled with the semiconductor giant, NVIDIA Corporation NVDA. To mount AI chips, Supermicro’s AI servers are required. Also, Supermicro holds just a 10% share in the AI server market, leaving more room to expand the business (read more: The Better AI Stock to Buy Now: NVDA or SMCI).

Meanwhile, Supermicro’s noteworthy 34% return on equity (ROE) surpasses the Computer- Storage Devices industry’s 20.4%, signifying strong profitability, as any ROE of more than 20% is generally considered robust (read more: Post Hindenburg Report: Buy, Hold, or Sell SMCI Stock?).

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SMCI Stock to Buy Hand Over Fist

While the chances of Supermicro being delisted from the Nasdaq lessen as the company appoints a new auditor and maintains a strong position in the AI server market, it makes all the sense to capitalize on the buying spree. And why not? After all, the SMCI stock is less pricey. According to the price/earnings ratio, SMCI trades at 8.4X forward earnings. However, the industry’s forward earnings multiple is 14.5X.

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SMCI stock rightfully has a Zacks Rank #2 (Buy). Brokers also believe that the SMCI stock will scale upward from now on. They increased the average short-term price target of the SMCI stock by 157.2% to $55.39 from the last closing price of $21.54. The highest short-term price target is $130, an upside of 503.5%. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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