If you have been an investor in artificial intelligence (AI) server maker Super Micro Computer (SMCI), chances are that your stress levels have been higher than normal lately. A simple glance at the stock's 9-month price range, from March highs near $122.90 to its Nov. 15 lows at $17.25, tells quite a colorful story on its own - and is enough to drive away many investors who had previously bet on the company's long-term prospects.

It started in August with poorly received earnings, then accelerated quickly when short seller Hindenburg Research published a scathing report accusing the company of accounting manipulation and fraud. The company then said it would delay filing its 10-K report for fiscal year 2024, and now risks being delisted from the Nasdaq for the second time in six years as investors continue to await audited financial results. More troubling, its auditor, Ernst & Young, resigned, after the “Big 4” auditor said it was “unwilling to be associated with the financial statements prepared by management.”

SMCI Stock Soars as Delisting Risk Drops 

However, SMCI stock jumped 31% in Tuesday's trading session, after the company unveiled a compliance plan submitted to the SEC in an attempt to avoid delisting. Crucially, Super Micro also announced the immediate appointment of BDO USA as its independent auditor - although BDO has been battling quality issues itself, with 86% of audits at the firm last year found to contain deficiencies, per an industry oversight board.

After surging about 78% in a wildly volatile week of trading, Super Micro Computer stock is certainly giving the short sellers a convincing squeeze - but is the AI server stock a solid investment right now? Let's take a closer look.

SMCI is a Cheap AI Stock: The Bull Case

Growing Market: Super Micro Computer (SMCI), established in 1993, designs, develops, and markets high-performance server and storage technology. Its solutions cater to data centers, cloud, enterprise IT, scientific computing, and embedded markets, positioning the San Jose-based firm as one of the largest producers of such systems.

Industry projections signal robust growth ahead, presenting a lucrative opportunity for SMCI. The AI server market is anticipated to grow at a CAGR of 18%, reaching $177.4 billion by 2032. Simultaneously, IDC forecasts data center storage capacity to rise from 10.1 ZB in 2023 to 21.0 ZB in 2027, driven largely by AI developments.

Competitive Advantage: Super Micro's competitive edge lies in its modular design approach, allowing the company to create bespoke server configurations quickly and efficiently. This ability to deliver tailored solutions under tight timeframes sets the firm apart in a market where customization is often complex.

Recent operational milestones underscore its market leadership. The company reported shipping over 100,000 GPUs per quarter and delivering 2,000 liquid-cooled racks since June 2024. Its pioneering adoption of liquid cooling for servers aligns with its commitment to sustainability, offering energy efficiency and reduced physical space requirements. This innovation lowers capital expenditures for data center operators, particularly those managing their facilities.

Moreover, SMCI’s partnerships with key industry players remain intact, a critical factor for maintaining its competitive position. During the recent earnings call, Michael Staiger, Senior Vice President of Corporate Development, reassured investors of the company’s robust relationship with Nvidia (NVDA) - which Nvidia CEO Jensen Huang seemed to confirm on his company's own earnings call this past week by calling out Super Micro as a partner. Staiger noted that Nvidia confirmed there have been no changes to allocation agreements, dispelling speculation about order redirection to other vendors. This confirmation underscores the stability of their collaboration, which is vital given Nvidia's dominance in the AI hardware space and its importance to SMCI's growth strategy.

Bargain Valuation: SMCI stock has underperformed significantly since its fiscal Q4 earnings report, and is now trading at a forward price/earnings (P/E) ratio of 10.52x and 0.70x forward sales. While these metrics suggest the stock is deeply undervalued for an AI growth company, the uncertainties surrounding its governance and regulatory scrutiny explain the discounted valuation.

SMCI Has Serious Issues: The Bear Case

Q1 Results Delay: The delay in releasing audited financial results for Q1 2025 does not help matters. Moreover, the preliminary Q1 numbers were a disappointment, as well with the company now expecting net sales in the quarter to be in the range of $5.9 billion to $6.0 billion, which is lower than its previous guidance range of $6.0 billion to $7.0 billion.

Further, management's guidance range for EPS has narrowed to $0.75 to $0.76, down from its previous range of $0.67 to $0.83.

DOJ Scrutiny: Governance concerns have intensified following the resignation of auditor Ernst & Young and reports of the U.S. Department of Justice investigating Super Micro's accounting practices. Key issues include related-party transactions with suppliers Ablecom and Compuware, controlled by CEO Charles Liang’s brothers, which totaled nearly $983 million over three years. Additionally, Charles Liang and his wife hold ownership stakes in Ablecom, raising questions about the independence of these relationships.

The company’s history of management turnover and regulatory challenges compounds these concerns. Former CFO Howard Hideshima departed amid SEC charges in 2018, and later joined a related party owned by Liang's brother. While a well-regarded CFO helped stabilize the company through its Nasdaq re-listing, his abrupt resignation in 2021 and subsequent allegations of being pushed out suggest underlying management instability.

Increased Competition: Regulatory and governance issues have created openings for competitors like Dell Technologies (DELL) and Hewlett Packard Enterprise (HPE) to capture market share. Both companies are well-positioned to capitalize on AI-driven demand, and may benefit from customer skepticism toward SMCI. In fact, recent reports suggest that Tesla (TSLA) CEO Elon Musk's AI company, xAI, has reallocated $6B worth of AI server orders to Dell could affect Super Micro's outlook further.

Moreover, Nvidia’s reported interest in alternate suppliers has drawn attention to Taiwan-based rivals Gigabyte and ASRock, which are expected to absorb some of Nvidia’s order flow in the event of potential supply disruptions. The rapid pace of innovation in AI rack server solutions makes market trust and stability critical for retaining leadership, areas where Super Micro may face challenges amid ongoing scrutiny.

Delisting Threat: Although the company has submitted a compliance plan to Nasdaq to prevent its delisting, the risk remains. Upon receipt of a notice of non-compliance, an issuer is usually granted 60 days to file a compliance plan. If the compliance plan is accepted, Nasdaq may grant an additional extension of up to 180 days from the due date for filing. For SMCI, this could theoretically extend the deadline to February 2025.

Getting delisted would be a major blow for the shares, and likely result in substantial additional losses as institutional holders dump their SMCI stock. Further, the company's shares would likely draw less liquidity, and it may face greater challenges while attempting to tap capital markets for growth initiatives.

What Do Analysts Say About Super Micro Computer Stock?

Super Micro stock is now a “Hold” on Wall Street, down from “Moderate Buy” a month ago, with a mean target price of $55.39. This denotes an upside potential of about 86.5% from current levels. Yet, out of 12 analysts in coverage, only 2 still rate SMCI a “Strong Buy” and one a “Moderate Buy,” with 7 maintaining a “Hold” and 2 calling it a “Strong Sell.”

Meanwhile, with Super Micro's ability to regain compliance still an open question, Northland analyst Nehal Chokshi remains skeptical about the stock, citing “lingering corporate governance questions.” Despite the “net positive” developments this week, the analyst is keeping SMCI's rating and price target suspended pending further clarity.