Supermicro’s $50 billion stock collapse highlights the risks of AI hype

In March, super microcomputer It was added to the S&P 500 index after increasing its stock price by more than 2,000% in two years, an incredible rally that dwarfed even the S&P 500 index. Nvidia’s You will get profit.

After all, S&P called it the top.

Less than two weeks after the index changes were announced, Supermicro hit a closing high of $118.81, giving it a market capitalization of nearly $70 billion. Since then, the stock has fallen 75%, pushing its valuation to about $17 billion. This is the first major sign in the public markets that not all the hype surrounding artificial intelligence may be justified.

Super Micro is one of the leading vendors building Nvidia-based server clusters for training and deploying AI models.

Shares plunged 33% on Wednesday after the company revealed that its auditor, Ernst & Young, had resigned because he “did not want to be involved in the financial statements prepared by management.” It fell another 12% on Thursday.

Supermicro is currently on the verge of being delisted from the Nasdaq and needs to regain compliance with the stock exchange by November 16th.

Mizuho analysts, who have a rating equivalent to a hold rating on Mizuho’s stock, said in a note on Wednesday: “The absence of an auditor increases the risk of delisting and may make it difficult to obtain a new auditor. I think there is,” he said.

Ernst & Young is new to the job, having just replaced Deloitte & Touche as Supermicro’s accounting firm in March 2023.

A Supermicro spokesperson told CNBC in a statement that the company “does not agree with E&Y’s decision to resign and is working diligently to select a new auditor.”

Representatives for Ernst & Young and Deloitte did not respond to requests for comment.

For most of Super Micro’s 30 years in business, it has plodded under the radar as a relatively obscure Silicon Valley data center company.

All that changed in late 2022, after the launch of ChatGPT by OpenAI started a historic wave of investment in AI processors, primarily powered by Nvidia. with DellSuper Micro packages powerful graphics processing units (GPUs) inside customized servers and is one of the big winners in the Nvidia boom.

Supermicro’s revenue has at least doubled in each of the past three quarters, but the company hasn’t filed formal financial information with the SEC since May.

Wall Street’s mood toward the company has changed dramatically.

Since S&P announced the index changes in March, Supermicro’s stock price has fallen by at least 10% seven times. The most concerning decline before Wednesday was on Aug. 28, when shares fell 19% after Supermicro announced it would not file its annual report with the SEC by the deadline.

“Additional time is required for SMCI’s management to complete its assessment of the design and operating effectiveness of internal control over financial reporting as of June 30, 2024,” the company said.

Hindenburg Research, a well-known short seller, subsequently disclosed short positions in the company, saying in a report that it had identified “new evidence of accounting manipulation.” The Wall Street Journal later reported that the Justice Department was in the early stages of investigating the company.

The month after announcing the report delay, Supermicro said it received a notice from Nasdaq stating that the delay in filing its annual report meant the company was not in compliance with the exchange’s listing rules. Supermicro said Nasdaq regulations give the company 60 days to file a report and submit a compliance recovery plan. Based on that deadline, the deadline would be mid-November.

This isn’t the first time for Super Micro. The company was previously delisted from Nasdaq in 2018.

Wedbush analysts understand the reason for the concern.

“This development is a sign that SMCI has passed its 10,000 filing deadline and the clock is ticking for SMCI to resolve this issue. “We see this as a major hurdle,” analysts said. The company wrote in its report that it recommends holding the stock.

As Supermicro’s stock price was in the midst of its steepest decline since 2018 on Wednesday, the company issued a press release on Tuesday, November 5, announcing that it would “provide a business update for the first quarter of fiscal 2025.” did.

That day is election day in America.

A Supermicro spokesperson told CNBC that the company believes the issues raised by Ernst & Young “will result in a restatement of its quarterly financial results for the fiscal year ending June 30, 2024, or any prior fiscal year.” said he did not expect it.

The decline continued Thursday, with stocks falling to their lowest since January. Analysts at Gordon Haskett called the Ernst & Young news a “backbreaker,” while Argus Research cited the Hindenburg memo, the Justice Department investigation report and Supermicro’s accounting firm departure. The stock prices of intermediate companies were lowered to hold. .

“The loss of the company’s audit firm and the Justice Department investigation mean the stock is no longer trading on fundamentals,” said Argus analyst Jim Kelleher.

Beyond Supermicro, this evolving case poses a potential crisis for S&P Dow Jones. After changing to super micro swirl The consumer electronics company’s stock is down about 3% on the S&P 500 index, underperforming the broader market but holding up much better than its alternatives.

Once a stock is included in the S&P 500, its stock price often increases. This is because wealth managers who track the index need to buy stocks to reflect the changes. This means that pension and retirement funds have more exposure for index members. Supermicro soared 19% on March 4, the first trading day after the announcement.

An S&P Global spokesperson said the company does not comment on changes to individual constituents or indexes, pointing to a methodology paper for general rules. The main requirements for inclusion are positive GAAP revenue for the last four quarters and a market capitalization of at least $18 billion.

S&P can make unplanned changes to the index at any time “in response to company actions or market trends.”

Kevin Barry, Cantata Wealth’s chief investment officer, said adding to such a closely tracked index would be a difficult move for stocks, especially given that tech stocks already make up about 30% of the index. It is necessary to take into account the volatility of

“It’s very likely that stocks will go up 10 to 20 times in a year or two and then go into indigestion,” said Barry, who co-founded Cantata this year. “With tech already by far the largest sector in the index, we are seeing a shift from less volatile stocks to more volatile stocks.”

—CNBC’s Rohan Goswami and Kif Leswing contributed to this report.

Correction: This article has been updated to correct a quote from a Super Micro spokesperson.