There was nothing micro about Super Micro Computer’sSMCI

impressive market performance this year, but the server tech company’s good fortune may be about to unravel. Ater spending most of 2024 among the market’s top-performing stocks, up more than 300% year-to-date, a warning from a prominent short-seller is shaping up to be larger than the company’s own AI sales.

Super scary: Earlier this year, investors were caught off guard — and skeptical — when Hindenburg Research alleged that Supermicro had cooked its books. But on Wednesday, in what appeared to validate Hindenburg’s initial claims, Ernst & Young LLP (EY) resigned as the company’s auditor, citing concerns with its governance and transparency. In a statement, EY said, “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.”

• In July, EY reportedly informed Supermicro of issues with the business’s internal controls and board independence — and expressed doubts about the company’s transparency and completeness with its auditors.
• By August, Hindenburg published its report accusing Supermicro of accounting manipulation, violations of sanction and export controls, and other issues, which led the company to delay its earnings and annual report.

Collateral Damage

Although there are various reasons why an audit firm might resign from a publicly traded company, most don’t bode well for Supermicro, especially given its history of accounting controversies and fresh allegations. Lending further credibility to the claims, the Justice Department is probing the global leader in energy-efficient IT infrastructure solutions — with more negative developments potentially on the horizon.

• Supermicro is currently seeking a new auditor but has yet to file its delayed annual report. A “business update” webcast will replace the upcoming earnings announcement.
• The company stock has fallen 71% from its all-time high on Mar. 13, 2024, with accounting controversies wiping out virtually all of its unprecedented year-to-date gains.

Is this loss? Thanks to its Nvidia-based server stacks, Super Micro had an edge that helped it dominate server racks. However, as scrutiny intensifies, DellDELL

and HP EnterpriseHPE

are gaining ground, already securing business from major cloud providers. Supermicro’s big F-up may already have a winner — it’s competition.