Struggling Artificial Intelligence (AI) Shares May Soar Soon. Here's the Reason Behind It.

Struggling Artificial Intelligence (AI) Shares May Soar Soon. Here's the Reason Behind It.

The recent events surrounding Super Micro Computer (SMCI dropping by -1.41%) have become some of the most intriguing chapters in the broader artificial intelligence (AI) saga.

At its zenith, Supermicro's shares soared over 300% earlier this year. However, commencing in August, shares embarked on a prolonged downturn of unprecedented proportions.

Over the past few months, it's been a succession of setbacks for Supermicro. Yet, what if I told you better times might be just around the corner?

I'm about to break down everything happening at Supermicro and explain why the stock plummeted. More crucially, I'll also examine why Supermicro could be on the cusp of recovery, and what that could mean for investors.

Taking a trip down memory lane

The plethora of ongoing drama at Supermicro over the past few months makes keeping up with all the commotion a fair challenge. Below is a timeline of each hurdle Supermicro has encountered, along with some details on the stock's performance as a result.

• August: Towards the end of August, Hindenburg Research released a report accusing Supermicro of accounting irregularities. Immediately following the release of this report, Supermicro's shares nose-dived by 19%. This marked the first domino to fall. Just one day subsequent to the publication of the Hindenburg report, Supermicro announced that they expected to file a Notification of Late Filing for their 10K annual report.
• September: Approximately a month after the Hindenburg piece, The Wall Street Journal reported that the Department of Justice (DOJ) was investigating Supermicro over their accounting practices, following a series of allegations raised by whistleblowers. Additionally, the committees at the Nasdaq stock exchange sent a warning to Supermico, suggesting that the company was at risk of being delisted from the exchange due to compliance issues.
• October: On Oct. 30, it was revealed that Big Four accounting specialist Ernst & Young LLP ("EY") had resigned as Supermicro's auditor.
• November: In mid-November, rumors began to swirl that Nvidia was rerouting some of its Blackwell order flow away from Supermicro. To provide some context, Supermicro specializes in the architecture for servers and storage clusters that house Nvidia's graphics processing units (GPUs). Since Blackwell is anticipated to be a bellwether for Nvidia, Supermicro stood to gain significantly from the robust momentum surrounding these GPUs.

Why better days could be on the horizon for Supermicro

Although accounting fraud is a serious allegation, I would encourage investors to remain calm. It's essential to remember that 'short sellers' like Hindenburg have a vested interest in seeing a stock price decrease. Furthermore, given all these challenges, Supermicro has taken some admirable strides to tackle the issues head-on and right the ship.

In late November, Supermicro announced the appointment of a new auditor firm, BDO USA, P.C. Simultaneously, management also shared that the company had submitted a compliance plan to the Nasdaq to avoid delisting.

Early December brought positive news for investors as the Nasdaq granted Supermicro's "request for an exception" to remain listed on the exchange through Feb. 25, 2025. However, if Supermico fails to file their 10K by then, the company will once again fall out of compliance.

Another announcement from earlier this month revolved around a Special Committee formed by Supermicro's Board of Directors. According to the internal review, the Special Committee "determined that the resignation of the Company's former registered public accounting firm, Ernst & Young LLP ("EY") and the conclusions EY stated in its resignation letter were not supported by the facts examined in the Review."

At first glance, it appears that Supermicro is slowly gathering momentum and that the proactive measures taken by management could potentially put the company on a path to recovery.

Is Supermicro stock a buy right now?

As the graph below demonstrates, Supermicro's forward price to earnings (P/E) multiple of 12.9 is far removed from prior intra-year highs and is now hovering near a low point. The current valuation picture, combined with the positive news mentioned earlier, might lead you to believe that Supermicro is an absolute bargain at the moment.

However, I believe drawing such a conclusion is more akin to an "pigs get slaughtered" mentality.

There are numerous moving parts to consider with Supermicro, and at this juncture, I think almost any news (positive or negative) could trigger the stock to fluctuate wildly.

In my opinion, there are simply too many unknowns surrounding Supermicro at the moment. Investing in the stock is akin to playing a game of chance -- it's not for the faint of heart and might be best avoided for now.

Given Supermicro's financial situation, now might be an opportune time for savvy investors to explore options in the world of finance. With the company's ongoing efforts to rectify accounting irregularities and regain investors' trust, the potential for profitable investing in Supermicro could present itself in the near future. As Supermicro navigates through this challenging phase, it's crucial to keep a close eye on any developments and make informed decisions based on financial analysis.

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