Super Micro Computer: A Cautionary Tale in the AI Boom
Super Micro Computer (SMCI) was once the darling of the market. Its stock soared, riding the wave of demand for AI hardware. However, this year has brought about a significant shift. For long-term investors, concerns about financial reporting and management reliability have surfaced, prompting a reevaluation of the company’s long-term prospects. This article outlines the reasons for being cautious about Super Micro Computer, and highlights alternative, more reliable investment avenues in the burgeoning field of artificial intelligence (AI).
Supermicro’s stock soared 2,760% in the two years leading up to March 13, 2024. The company’s hardware was in high demand as many hyperscale data centers were loading up on the company’s hardware to drive their AI operations. However, this impressive run appears to have peaked.
Red Flags and Recovering Credibility
The company’s journey through 2024 was marked by several challenges. There were delays in financial filings, thus raising critical questions about the company’s financial reporting accuracy. Furthermore, the company’s auditors resigned, citing unreliable data from Supermicro’s management and audit committee. The stock price mirrored the mounting worries, dropping as much as 84.8% from its March highs.
While Supermicro’s stock has since recovered, climbing more than 125% from its November low, and the company has taken steps to address the issues, including filing the delayed reports and hiring a new auditor, doubts remain. The current auditing firm, while experienced, is not at the same level as the global auditing titans, and the filings might need further adjustments.
For investors prioritizing reliable management teams and dependable financial reports, the loss of credibility last year is a significant factor. Rebuilding trust takes time, and more promising AI opportunities exist.
Exploring Alternative AI Opportunities
Fortunately, investment options abound in AI, including those boasting stellar leadership teams and credible financial reporting practices. Let’s explore why Alphabet (GOOG) (GOOGL), IBM (IBM), and Nvidia (NVDA) are currently more attractive options.
Before diving in, it’s worth noting that each of these companies depends on one of the Big 4 accounting firms for auditing: Ernst & Young for Alphabet and PriceWaterhouseCoopers for IBM and Nvidia.
Nvidia: An Attractive Option
Nvidia’s stock price, once a hurdle for many, has become more approachable. It’s a key player in the AI accelerator market, and at this point, it’s starting to look affordable again.
Nvidia scores highly in leadership quality reviews, showing a history of consistent top scores. The company’s leadership and solid position make it a compelling investment opportunity.
Alphabet: Design for Long-Term Success
Alphabet’s Google division is a regular on the “best places to work” lists. Employees value the generous compensation and the innovative company culture. And Alphabet is the leading provider of AI services.
Alphabet’s long-term design promises to withstand market fluctuations. Its core operations of online search and advertising are bolstered by diverse products and services, making Alphabet a resilient force.
Alphabet trades at 20.5 times trailing earnings, a ratio that is modest for a mature, slow-growing consumer goods business. With sales growth at a compound annual rate of 17.3% over the last five years, a higher price-to-earnings (P/E) ratio would be appropriate.
IBM: A Business-First Approach
IBM’s AI product is well-suited to business-class clients. Its data analytics and large language models (LLMs) come with features for data safety and auditable tracking, features not found in some competitors.
IBM is a textbook example of long-term planning and customer focus, with its stock doubling in the last year as investors recognize its AI expertise.
It’s about finding investments that offer stability, reliability, and good management. While Super Micro Computer navigates its challenges, Alphabet, IBM, and Nvidia present compelling, more secure avenues for participating in the AI revolution.
