Buying a top growth stock after it plummets in value can have the potential to produce significant returns. But investors should be careful in picking up stocks which crashed heavily, as there are often good reasons for the sell-off. The risk is you may end up buying a stock that's destined to fall even further in value.
Super Micro Computer (NASDAQ: SMCI) is a good example of a stock which may have a lot of potential upside that's down big. In just six months, its shares dropped 57%. There are significant questions surrounding the company as it has recently changed auditors, and it has been several months since it last filed its quarterly earnings.
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But is the stock cheap enough to be worth buying right now despite these concerns?
Everything hinges on its financials
As cheap as Super Micro's stock looks right now, everything depends on what its new auditor, BDO, says and what its audited financials show. The Nasdaq exchange granted Super Micro an extension until Feb. 25 to file its annual report for the 2024 fiscal year ending June 30, 2024, and its first quarter 2025 report for the period ending Sept. 30, 2024. If it can do that successfully, that should calm investors' fears about the stock.
The big concern back in October was that its auditor at the time, Ernst & Young, resigned. And it wasn't just the fact that it resigned which was the concern; it was the manner in which it did that raised eyebrows. The auditor had reservations about the company's internal controls and the board's independence from CEO Charles Liang. Its concerns were so great that the auditor was "unwilling to be associated with the financial statements prepared by management."
It's not unusual for a company to change auditors or even to have disagreements with them. But the scale of this disagreement and the nature of the resignation letter raised some big questions around the business. If, however, BDO gives Super Micro's financials its seal of approval, there are no major adjustments to be made, and the company files its quarterly and annual reports next month in accordance with its agreement with the Nasdaq's regulators, shares of Super Micro could soar.
But if that doesn't end up happening, then there could be even greater sell-off to follow.
If significant adjustments need to be made, then the stock may not seem cheap anymore
By looking at Super Micro's stock, it may appear that it's still worth the risk, since it's trading at a fairly modest 15 times earnings. For a company that is involved with selling servers and IT infrastructure, and which has benefited greatly from an influx of demand due to artificial intelligence (AI), it may seem like it's a no-brainer buy, even if there is some risk relating to its financials.
But if its preliminary first-quarter 2025 numbers and Q2 guidance are impacted by restated financials, Super Micro could see a much more expensive price-to-earnings (P/E) multiple than it currently has, and its valuation could be much more expensive.
Unfortunately, with such a big cloud hanging over the business, it's hard to gauge what the stock should be trading at today. Until there's some resolution to the current situation and investors see what its audited financials look like, there's going to be plenty of risk surrounding the business.
Investors may want to hold off on investing in Super Micro for now
There are a lot of different ways the situation may unfold for Super Micro. Rather than betting on that, investors may simply want to take a wait-and-see approach with the tech stock. It's only a bargain buy if its numbers are accurate and can be relied upon. And right now, it's not clear that is the case.
Buying shares of the company would be a speculative move at this point. Unless you have a high risk tolerance, you'll probably be better off avoiding Super Micro and pursuing other growth stocks instead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. 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.
