Super Micro Computer Inc (NASDAQ: SMCI) opened about 35% down this morning after Ernst & Young confirmed that it no longer wishes to continue as the auditor of the AI server company.
“We are unwilling to be associated with the financial statements prepared by management,” the auditor said in its resignation letter on Wednesday.
EY had first flagged issues with the company’s governance and forthcomingness in July.
It also urged the management to form a special committee to investigate its internal controls at the time.
Supermicro stock is now down more than 70% versus its year-to-date high in March.
Here’s why EY news matters for Supermicro stock
Note that Ernst & Young is not alone in raising concerns about the financial controls at Super Micro Computer Inc.
Short-seller Hindenburg Research also accused the artificial intelligence company of accounting manipulation in its report in late August. According to EY:
We’re resigning due to information that has recently come to our attention, which has led us to no longer be able to rely on management’s and the Audit Committee’s representations.
The auditor chose to resign this morning also because it was not convinced that the board of SMCI is fully independent from Charles Laing (chief executive) and other members of the management.
Supermicro representatives are yet to comment on today’s development.
Heading into Wednesday, Wall Street rated SMCI stock at “overweight” with upside to $68 on average or 38% on its previous close.
Should you buy SMCI shares on the weakness?
Super Micro Computer is yet to publish its financial statements for the year – and is reportedly facing a federal probe as well.
Put that together with the EY news today and the stock immediately starts to look a bit too risky at writing even for the most aggressive of investors.
SMCI recently said it’s shipping more than 100,000 AI chips per quarter.
Still, its recent earnings have been rather disappointing of late.
Supermicro earned $6.25 a share in its latest reported quarter – well below $8.07 per share that analysts had forecast.
The company’s revenue also came in only marginally ahead of Street estimates in fiscal Q4.
More importantly, it reported a sharp decline in its gross margin from 17% last year to just 11.2% in the fourth quarter.
The metric was even down sequentially from 15.5%.
Finally, Supermicro stock is not a dividend payer to make it any more attractive for income investors.
So, all in all, it’s evident that things are pointing downward for this AI play at writing.
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