Super Micro’s $50B Share Collapse Underscores the Risk of Artificial Intelligence Hype

In March Super Micro Computer was added to the S&P 500 after a massive run that saw the stock rise more than 2,000% in two years, eclipsing even NVIDIA profit.

As it turned out, the S&P was calling the top.

Less than two weeks after the index change was announced, Super Micro hit a closing high of $118.81 and a market capitalization of nearly $70 billion. Since then, shares have fallen 72%, valuing the company at less than $20 billion, the first major sign in public markets that the hype around artificial intelligence may not be entirely justified.

Super Micro is one of the leading vendors building clusters of Nvidia-based servers to train and deploy artificial intelligence models.

Shares fell 33% on Wednesday after the company said its auditor, Ernst & Young, had resigned, saying he had “no desire to participate in the financial statements prepared by management.” On Thursday it fell another 16%.

Super Micro is now in danger of being delisted from Nasdaq and has until Nov. 16 to regain stock exchange compliance.

“We see a higher risk of delisting due to the lack of an auditor and the potential challenge of obtaining a new one,” Mizuho analysts, who have the equivalent of a “hold” rating on the stock, wrote in a report Wednesday.

Ernst & Young was new to the role, having just replaced Deloitte & Touche as Super Micro’s accounting firm in March 2023.

A Super Micro spokesperson told CNBC that the company “does not agree with E&Y’s decision to resign and we are working diligently to select new auditors.”

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

For most of Super Micro’s three decades, the company existed under the radar, forging ahead as a relatively unknown data center company in Silicon Valley.

That all changed in late 2022 after the launch of OpenAI ChatGPT sparked a historic wave of investment in artificial intelligence processors, mostly supplied by Nvidia. Together with DellSuper Micro has been one of the big indirect winners of Nvidia’s boom by putting powerful graphics processing units (GPUs) inside specialized servers.

Super Micro’s revenue has at least doubled in each of the previous three quarters, even though the company has not filed formal financial statements with the SEC since May.

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

Since S&P announced the index change in March, Super Micro shares have fallen by at least 10% several times. The most alarming drop ahead of Wednesday came on Aug. 28, when shares fell 19% after Super Micro said it would not file its annual report with the SEC on time.

“SMCI management requires additional time to complete its assessment of the design and operating effectiveness of internal control over financial reporting as of June 30, 2024,” the company said.

Prominent short seller Hindenburg Research then disclosed a short position in the company and said 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.

A month after announcing the filing delay, Super Micro said it received a notice from Nasdaq indicating that the delay in filing its annual report meant the company was not in compliance with the exchange’s listing rules. Super Micro said Nasdaq rules give the company 60 days to file a report or plan to regain compliance. Based on these timelines, the deadline would be mid-November.

This won’t be the first game for Super Micro. The company was previously delisted from Nasdaq in 2018.

Wedbush analysts see cause for concern.

“As SMCI has missed the deadline for filing the 10K return and the time is ticking for SMCI to resolve this issue, we view this development as a major obstacle standing in the way of SMCI filing its return on time to avoid delisting,” analysts , which I recommend holding shares, the report said.

With Super Micro’s stock experiencing its steepest selloff since 2018 on Wednesday, the company issued a press release on Tuesday, November 5, announcing it would “provide a business update for the first quarter of fiscal 2025.”

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A Super Micro spokesperson told CNBC that the company does not expect the issues raised by Ernst & Young to “result in any revision to its quarterly financial results for the fiscal year ended June 30, 2024 or prior fiscal years.”

The sell-off continued on Thursday, with shares falling to their lowest levels since January. Analysts at Gordon Haskett called the Ernst & Young news “unsustainable,” and Argus Research downgraded the intermediate firm’s stock to “hold,” citing the Hindenburg note, the Justice Department’s investigative report and the departure of accounting firm Super Micro. .

“The company’s loss of its accounting firm and the DOJ investigation mean the stock is no longer trading on fundamentals,” Argus analyst Jim Kelleher wrote.

Super Micro aside, the developing incident could be a black eye for the S&P Dow Jones. Since replacing Super Micro jacuzzi On the S&P 500, shares of the appliance company fell about 3%, underperforming the broader market, but holding up much better than its peers.

Inclusion in the S&P 500 often causes stocks to rise as money managers tracking the index are forced to buy shares to reflect the changes. This means pension and pension funds have more influence over index participants. Super Micro shares rose 19% on March 4, the first trading day after the announcement.

An S&P Global spokesman said the company does not comment on individual index components or changes and pointed to its methodology document with general rules. The main requirements for inclusion are positive GAAP earnings for the most recent four quarters and a market capitalization of at least $18 billion.

S&P may make unscheduled changes to its indexes at any time “in response to corporate actions and market developments.”

Kevin Barry, chief investment officer at Cantata Wealth, says more attention should be paid to stock volatility when making additions to such a closely watched index, especially since technology already accounts for about 30% of its weight.

“The likelihood of a stock going up 10 or 20 times in a year or two and then having that moment of indigestion is extremely high,” said Barry, who co-founded Cantata this year. “You’re moving from low-volatility stocks to higher-volatility stocks at a time when technology is already the largest sector in the index.”

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

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