Super Micro Computer (NASDAQ: SMCI) stock has taken investors on a wild ride over the last year. The company's share price rocketed higher in conjunction with soaring demand for its high-performance rack servers for artificial intelligence (AI), hitting a split-adjusted stock price of $118.81 in March of last year. But the good times didn't last.
Along with some potential performance red flags in its earnings reports, Supermicro stock saw dramatic valuation pullbacks as concerns were raised about accounting practices at the company. The day after now-defunct short-selling firm Hindenburg Research published bearish coverage on the stock and alleged repeated accounting violations, the AI hardware specialist announced it was delaying its annual 10-K report. Then, Ernst & Young stepped down as the company's financial auditor in October.
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Supermicro has since hired BDO to handle its auditing and has said that it will finally file its delayed 10-K report by Feb. 25. But, at the time of this writing, the company's share price is now down roughly 77% from its high.
If Supermicro's official filing for its last fiscal year arrives without any big changes to business results the company has already reported, its share price could soar in the near term. But there's a fundamental long-term catalyst investors should also be keeping an eye on.
Gross margin performance will be key for Supermicro in 2025
Even before the company's accounting issues kicked off big sell-offs for its stock, Supermicro had started to see a valuation pullback in conjunction with concerns about its gross margins. Take a look at the chart that tracks the company's quarterly gross margin up to the end of its 2024 fiscal year, which wrapped up on June 30.
SMCI Gross Profit Margin (Quarterly) data by YCharts
Due to its accounting issues, Supermicro did not publish official results for the first quarter of its current fiscal year. But the company did publish unaudited preliminary results for the period and said that it expected to report a gross margin of roughly 13.3% for the period. Supermicro stock looks risky, but it could rebound if gross margins tick up with this year's earnings reports.
Investors should only consider investing in Supermcro stock at this juncture if they're comfortable taking on the risks related to potential downward revisions the company could wind up making when the company submits its 10-K report for last year. As mentioned earlier, movement on that front should be happening in the not-too-distant future, as the company has said it will file the report by Feb. 25.
For those who are willing take on that risk, the gross margin picture will quickly become a key driver in the overall valuation picture. If you think that the business's gross margins will climb significantly above the 13.3% level that it reported with its unaudited preliminary results for fiscal Q1 and aren't deterred by potential accounting and regulatory risks, the stock could have big upside potential at current prices. But for investors who aren't willing to take on high levels of risk, it could be better to stay on the sidelines until the gross margin picture and the answers to other questions become more clear.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
