Analysts at Needham had seen enough.
The investment firm said on Oct. 30 that it was suspending its buy rating of Super Micro Computer (SMCI) shares after the maker of liquid-cooled artificial-intelligence servers said its auditing firm, Ernst & Young, had resigned.
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Super Micro said in a Securities and Exchange Commission filing that the auditor had delivered its decision in a letter to the company’s audit committee.
“We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management’s and the Audit Committee’s representations,” Ernst & Young said.
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The Big 4 accounting firm said it was “unwilling to be associated with the financial statements prepared by management, and after concluding we can no longer provide the audit services in accordance with applicable law or professional obligations.”
Shares of the San Jose, Calif., company, which hit a record $122.90 in March, plummeted 34% to $32.42 at last check.
Charles Liang, chief executive of Super Micro Computer
Analysts concerned about Super Micro’s financial statements
Ernst & Young had been engaged last year to perform an audit for the fiscal year ending June 30, and it did not issue any report on the company’s financial statements or its internal control over financial reporting.
The accounting firm told the audit committee in late July about concerns about several matters “relating to governance, transparency and completeness of communications to EY, and other matters pertaining to the company’s internal control over financial reporting, and that the timely filing of the Company’s annual report was at significant risk.”
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EY expressed concerns about the Super Micro’s board independence from the president and CEO of Super Micro and other members of management
In response, the filing said, the board appointed an independent special committee to review EY’s concerns. The review continues and final findings and recommendations have not yet been communicated to EY or the board.
While Super Micro said it did not agree with EY’s decision to resign, the company said it took EY’s concerns seriously and would “carefully consider” the special committee’s findings.
Needham suspended its rating on the company following news of Ernst & Young’s resignation, according to The Fly.
The investment firm said that not only did the accounting firm’s action “raise considerable questions about the validity of Super Micro’s current and past financial statements but it also raises significant questions about Super Micro’s corporate governance and management’s commitment to integrity and ethical values.”
Needham had initiated coverage of Super Micro on Sept. 18 with a price target of $600 a share.
Super Micro said it did not currently expect that resolution of any of the matters raised by EY, or under consideration by the special committee, would result in restatements of its quarterly reports for fiscal 2024 ended June 30 or for prior fiscal years.
EY earlier this year said it was cutting ties with many U.S. public companies in a move to revamp its auditing practice and improve the quality of its work, the Journal said.
EY has dropped dozens of clients since the start of last year, including drugmaker Catalent and hydrogen truck maker Nikola.
Short-seller found ‘glaring accounting red flags’
The filing is the latest chapter in the Super Micro saga.
Last month, The Wall Street Journal reported that the U.S. Department of Justice was investigating the company after short-seller Hindenburg Research alleged “accounting manipulation” at the AI-server maker.
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Needham says Ernst & Young’s resignation is likely to bolster the DoJ’s investigation into Super Micro, which carries its own risk, and it sees increased default risk associated with the company’s term loan agreement with Bank of America.
In August, Hindenburg released a scathing report on SMCI, saying that it had “found glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.”
After Hindenburg Research announced its findings, Super Micro delayed the filing of its annual report.
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Super Micro’s shares soared on Oct. 7 after the company said it had deployed more than 100,000 graphics-processing units with liquid cooling solutions “for some of the largest AI factories ever built, as well as other [cloud-service providers].”
“Early this year, Super Micro Computer was one of the AI craze darlings, running a rough 345% from early January to early March,” TheStreet Pro’s Stephen Guilfoyle wrote on Oct. 8. “Was that nuts? Sure. Things really got nuts after the apex of the share price, though.”
The veteran analyst, whose career stretches back to the 1980s on the floor of the New York Stock Exchange, said the stock was added to the S&P 500 and the Nasdaq 100 and the company declared a 10-for-1 stock split when it reported its June-quarter financial results in early August.
Guilfoyle noted that “this is a whole lot of baggage where the outcomes remain uncertain.”
“That is quite a bit to overlook when putting valuable capital to work,” he said.
Super Micro did not immediately respond to a request for comment.
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