Super Micro Computer (SMCI) has witnessed a remarkable turnaround in its stock performance, surging by more than 30% on Tuesday. This significant recovery comes after the company, a major player in the artificial intelligence (AI) server market, submitted a compliance plan to the U.S. Securities and Exchange Commission (SEC) to avoid delisting from the Nasdaq.
This development has brought renewed investor confidence, despite the company facing numerous challenges over recent months, including delayed filings, regulatory scrutiny, and internal upheaval.
🚨 BREAKING NEWS 🚨
SUPER MICRO COMPUTER $SMCI HAS JUST APPOINTED BDO USA AS ITS NEW AUDITOR EFFECTIVE IMMEDIATELY
AND THEY HAVE ALSO SUBMITTED A COMPLIANCE TO THE NASDAQ TO REQUEST AN EXTENSION TO GAIN COMPLIANCE $SMCI IS THE BIGGEST FRAUD IN U.S STOCK HISTORY$SPY pic.twitter.com/ryAlcMgZto
— Mike Investing (@MrMikeInvesting) November 18, 2024
The filing, made on Monday, assured investors that Super Micro intends to meet its periodic reporting obligations within the discretionary period granted by Nasdaq. This announcement has provided a much-needed respite for the stock, which has endured a tumultuous year marked by sharp declines and reputational setbacks.
The Reasons Behind the Surge
Super Micro’s stock jump is primarily attributed to its proactive approach in addressing regulatory concerns. The company has assured stakeholders that it is on track to resolve delays in its financial reporting and that the submitted compliance plan demonstrates a clear roadmap to achieving these goals.
This move was anticipated following a report by Barron’s on Friday, which cited insiders suggesting the company would meet the Monday deadline to submit its plan. The report created a buzz in the market, resulting in a 16% rise in the stock price during Monday’s trading session.
Another factor boosting investor sentiment is the company’s recent announcement of hiring a new auditor, BDO. The appointment follows the resignation of Ernst & Young (EY) in late October, a move that had previously caused a significant dip in Super Micro’s stock. The new auditor is expected to restore confidence in the company’s financial practices, which have been under scrutiny since the publication of a report by short-seller Hindenburg Research.
Challenges and Setbacks
Despite this week’s surge, Super Micro’s stock has faced a challenging trajectory throughout 2024. The company’s shares have plummeted by over 20% this year, including a dramatic 56% drop over the past three months. This downturn was triggered by multiple issues, including the Hindenburg Research report, which alleged accounting malpractices, export control violations, and questionable relationships between top executives and business partners.
$SMCI will be delisted from the Nasdaq on Nov 18, 2024 unless it provides an audited annual report or a plan to regain compliance.
Ernst & Young resigned as auditor 2 weeks ago citing integrity concerns. $SMCI is $NVDA‘s 3rd largest customer & close partner with vendor financing https://t.co/g3S6n9UUOM pic.twitter.com/jfDWpSTGbj
— Financelot (@FinanceLancelot) November 14, 2024
In response to these allegations, Super Micro delayed its annual 10-K filing with the SEC, followed by a postponement of its quarterly 10-Q report last week. These delays, combined with an ongoing investigation by the Department of Justice (DoJ), have weighed heavily on the company’s stock performance. EY’s abrupt resignation in October, citing concerns over the company’s financial practices, further exacerbated the situation, leading to a 30% drop in the stock in a single day.
Adding to these woes, Super Micro’s fiscal first-quarter earnings report on November 5 fell short of Wall Street expectations, resulting in an 18% decline in the stock price the following day. These setbacks underscore the significant challenges the company has faced in maintaining investor trust and market stability.
The Role of AI in Super Micro’s Growth
Super Micro’s rise to prominence over the past year can largely be attributed to the booming demand for AI-related technologies. The company, in partnership with Nvidia, has become a key supplier of high-tech servers equipped with advanced AI chips. One of its most notable achievements was securing a major deal to supply servers to Elon Musk’s xAI initiative.
In its fiscal year 2024, the company reported impressive growth, with adjusted earnings increasing by nearly 90% to $2.21 per share and revenue soaring by 110% to $15 billion. Analysts remain optimistic about the company’s future prospects, forecasting over 40% growth in earnings and a 70% increase in sales for the fiscal year 2025.
Despite these positive developments, Super Micro’s dependence on the volatile AI market poses both opportunities and risks. While the demand for AI servers and related technologies is expected to grow, the company must address its internal challenges and regulatory issues to sustain its market position.
Regulatory Scrutiny and Market Reactions
Super Micro’s troubles with regulatory bodies began in August when Hindenburg Research published a report alleging financial irregularities and other unethical practices. The report painted a grim picture of the company’s internal operations, raising questions about its governance and transparency.
The subsequent investigations by the SEC and the DoJ have kept the company under the regulatory spotlight. These developments have not only tarnished its reputation but also created uncertainty among investors. However, the submission of a compliance plan this week has been a step toward addressing these concerns, signaling the company’s commitment to resolving its issues and moving forward.
Chip Industry with Donald Trump as President
Donald Trump’s return to the White House is set to bring significant changes to the U.S.-China relations in the semiconductor industry. Known for his hardline approach towards trade with China during his first term, Trump introduced sweeping restrictions on Chinese tech firms, particularly targeting the semiconductor sector. These actions were part of his broader agenda to curb China’s technological growth and maintain U.S. dominance in critical industries.
With Trump’s re-election bid gaining momentum, experts predict an escalation in the already tense U.S.-China chip war. His campaign rhetoric indicates a stronger stance on tariffs, export controls, and trade restrictions. This could create ripple effects across the global semiconductor supply chain, affecting key players in allied nations such as Japan, the Netherlands, and Taiwan. The potential return of Trump to the presidency could mark a new chapter in the geopolitical struggle over semiconductor technology.
Trump’s First-Term Crackdown on Chinese Semiconductors
During Trump’s first term, he initiated strict measures to limit China’s access to advanced semiconductor technology. In 2019, his administration added Huawei, a Chinese tech giant, to the U.S. Entity List. This move effectively barred American companies from supplying Huawei with critical components unless they received special licenses. The government justified these actions by citing national security concerns.
This blacklist was later extended to other Chinese semiconductor firms, including SMIC, China’s largest chipmaker. These restrictions aimed to prevent China from developing advanced chips necessary for technologies like artificial intelligence, 5G networks, and high-performance computing. Trump also expanded the use of the foreign direct product rule, which restricted foreign companies using U.S. technology from exporting products to blacklisted Chinese firms.
These measures significantly disrupted China’s semiconductor supply chain, forcing the country to seek alternatives. Despite the Biden administration continuing many of these policies, Trump’s return could bring an even harsher approach.
Escalation of the U.S.-China Chip War
If Trump regains the presidency, he is likely to intensify restrictions on China’s semiconductor sector. Arthur Dong, a professor at Georgetown University’s McDonough School of Business, has warned that Trump could implement broader tariffs and export controls. This could include blanket tariffs on a wider range of goods and stricter measures against Chinese tech companies.
Under Biden, the U.S. considered expanding the foreign direct product rule to include more goods produced with American technology, even by companies based in allied nations like Japan and the Netherlands. Although there were discussions about exempting certain allies, Trump’s policies might not offer similar leniency. His administration could push allies to adopt stricter trade restrictions on China, further isolating the country from global semiconductor markets.
The potential for more aggressive actions against China has raised concerns among semiconductor manufacturers worldwide. Companies like ASML, a Dutch maker of advanced chipmaking equipment, have already expressed worries about the implications of stricter U.S. export controls.
Criticism of the CHIPS Act
Trump’s criticism of the CHIPS and Science Act, a Biden-era initiative, further highlights his divergent approach to the semiconductor industry. The act, passed in 2022, allocated billions of dollars to boost domestic chip manufacturing in the U.S. It aimed to reduce reliance on foreign chipmakers like TSMC and promote technological self-sufficiency.
During an interview, Trump dismissed the CHIPS Act as ineffective, calling it a “bad deal” that benefits wealthy corporations without ensuring significant returns for the U.S. economy. He argued that instead of providing subsidies to chipmakers, the U.S. should impose tariffs on imported chips to encourage domestic production.
Trump says the CHIPS and Science Act, which brings thousands of manufacturing jobs back to America, “is so bad” and says he wants to replace it with tariffs that will raise prices on the middle class pic.twitter.com/6ZrbRl71dL
— Kamala HQ (@KamalaHQ) October 26, 2024
While the CHIPS Act has attracted investments from major players like Intel, TSMC, and SK Hynix to build semiconductor facilities in the U.S., Trump’s approach could shift focus away from subsidies toward stricter trade policies. This could create uncertainty for chipmakers planning to expand operations in the U.S.
BREAKING: I asked @SpeakerJohnson if he’ll try to repeal the CHIPS Act if Trump wins and they have control of Congress.
“I expect that we probably will.”@RepWilliams responds: “I will remind him night and day how important the CHIPS Act is.” #NY22 @CitrusTVNews 🚨 pic.twitter.com/tUGwZMNMJM
— Luke Radel (@lukeradel) November 1, 2024
For U.S. allies like Japan and the Netherlands, Trump’s policies might force difficult decisions. Companies like Tokyo Electron and ASML, which supply critical equipment for chipmaking, could face restrictions on selling to Chinese firms. This might strain diplomatic relations and impact the profitability of these companies.
China, on the other hand, may accelerate efforts to achieve self-sufficiency in semiconductor manufacturing. The country has already invested heavily in developing its domestic chip industry, but it still lags behind in advanced technologies. Stricter U.S. policies could push China to intensify these efforts, potentially creating a bifurcated global semiconductor market.
