Shares have lost 70% of their value in the last six months. Super Micro Computer (SMCI 6.42%) is in an impasse. As revenue and earnings continue to break records, good news arrives overshadowed Due to uncertainty regarding the Company’s internal controls.

These problems came to a head when Supermicro’s auditor, Ernst & Young, recently resigned, citing his reluctance to be associated with the company’s financial statements. Let’s dig deeper to see what this crisis could mean for shareholders next year and beyond.

Short sellers may be right.

short seller It can be easy to hate organizations for their self-serving business models and conflicts of interest. Typically, these teams will have a position in the companies they criticize, allowing them to profit significantly from the bad press, even if it is not true. But in some cases, they point out problems that other investors overlook

In late August, Hindenburg Research published a scathing report saying Super Microcomputer had engaged in accounting manipulation, self-dealing, and sanctions evasion related to Russia’s invasion of Ukraine. The allegations caused a stir. While management rejected them, it also delayed submitting its annual report to assess what it called “internal controls over financial reporting” a bad sign.

In late September, the U.S. Department of Justice opened an investigation into Supermicro for possible accounting violations. And this month the company’s auditor, Ernst & Young, resigned after months of disagreement with management over governance and internal controls. These developments suggest that Hindenburg’s allegations about Supermicro’s poor accounting practices may have some truth to them.

Investors should also be mindful of Hindenburg’s other allegations of sanctions evasion or self-dealing, which could result in fines from the Securities and Exchange Commission (SEC) or other regulatory penalties depending on the severity of the investigation’s findings.

What will next year bring?

Where there is smoke, there may be fire. In the coming years, investors should expect more bad news regarding Supermicro’s accounting and internal controls.

Analysts Mizuho Fear that a shortage of auditors (and potential difficulties in finding a new auditor) could lead to delisting Nasdaq changing. This It could significantly reduce Supermicro’s liquidity by forcing it to trade over the countera designation that could make it difficult to access shares and possibly harm the company’s valuation.

Image source: Getty Images.

But while investors should approach Supermicro’s financial reports with caution, its core operations remain strong. The company’s fiscal 2024 fourth-quarter revenue rose 143% year over year to $5.3 billion, driven by strong demand for data center liquid cooling systems and computer servers that transform AI chips. Nvidia and others are converted into a consumer-ready form.

The company’s profitability also remains resilient, with net income up 82% to $353 million in the period.

Is it cheap for a reason?

Despite impressive revenue and profit growth, Supermicro forward price/earnings multiplier (P/E) It’s only 10, which is breathtakingly low considering its triple-digit growth. For context, S&P 500 Artificial Intelligence hardware leader Nvidia’s forward P/E ratio is 36, while its forward forecast is 25.

Super Microcomputer faces tremendous uncertainty about the quality of accounting and other internal controls, so the discount in its stock price appears to overreflect potential risk. While it’s too early to buy shares, investors shouldn’t be surprised if the company rebounds as more information becomes available.