The Value of Trust
Super Micro valuation crashed by $15B+ because of lost trust
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Super Micro’s Big Crash
Super Micro announced last week that its auditor (Ernst & Young) abruptly resigned because the auditors were "unwilling to be associated with the financial statements prepared by management.”
Super Micro stock price immediately tanked on the news — dropping nearly 50% in just a few days.
Super Micro is a publicly traded company that makes servers that help with AI stuff (my very technical summary). Super Micro has seen a huge increase in business since the AI boom.
Just three years ago Super Micro was valued as <$2B. Earlier this year it was valued as much as $65B! Lots of things were going well for Super Micro.
2023 revenue of $7.1B (37% YoY growth)
2023 net income of $640M (a huge increase)
Added to the S&P 500 in March 2024
Fast forward just 7 months after being added to the S&P 500….and Super Micro has lost $50B in market cap and is facing the possibility of being delisted as a public company.
While some of the valuation spiral was a miss in financial expectations, a significant amount was due to investors losing their trust in Super Micro.
Super Micro Timeline of Events
2018: Temporarily delisted due to delays in filing financial statements due to an internal investigation into accounting practices.
August 2020: The SEC charged Super Micro with "widespread accounting violations," including improper revenue recognition and understating expenses.
Post-2020: After resolving the SEC charges, Super Micro rehired certain executives previously terminated in connection with the accounting issues. This move raised concerns about governance and oversight.
July 2024: Super Micro's new auditor, EY, communicated significant concerns to the Audit Committee regarding governance, transparency, and internal controls.
August 2024: Super Micro delayed filing its annual report, citing the need to assess internal controls over financial reporting. This delay followed a report by Hindenburg Research alleging accounting manipulation and other issues.
September 2024: The DOJ launched an investigation into Super Micro's accounting practices
October 24, 2024: EY resigned as Super Micro's auditor
October 30, 2024: Filed an 8-K with the SEC, disclosing EY's resignation and the circumstances leading to it. This is when the public found out.l and the stock price tanked.
Ongoing: A special committee, with external investigators, continues to review the concerns raised by EY and other parties regarding Super Micro's governance and financial reporting practices.
Auditor Resignation
It is extremely rare for an auditor to abruptly resign like EY did with Super Micro. The problems EY saw must be really serious.
EY sent a very clear message in their communications about Super Micro:
Questions were raised “about whether the Company demonstrates a commitment to integrity and ethical values”.
“We can no longer provide the Audit Services in accordance with applicable law”
EY is basically saying that Super Micro is actually Super Shady. EY decided it was so bad that they needed to resign because they wouldn’t feel comfortable putting their name on any Super Micro reports.
Super Micro’s stock is down almost 50% in the last few days, which is $15B in valuation!! And this is after Super Micro was earlier hit with a damaging short report accusing them of accounting manipulation and after a disappointing financial performance earlier this year.
The stock is down nearly 80% from its high just 7 months ago. Super Micro was added to the S&P 500 at the very peak…
Auditors Build Trust
Auditors are supposed to provide assurance that a company’s financials are prepared in accordance with accounting rules. This gives investors comfort that the financials they review are accurate and that the company is not committing fraud.
The financial markets are built on trust and auditors play a critical role in maintaining that trust.
Public companies want their investors trust so they want the most trusted audit firms performing their audits. This is why most public companies opt to have one of the “Big 4” audit firms be their auditors. The Big 4 audit firms (Deloitte, PwC, EY, and KPMG) perform 88% of the audits for all large accelerated filers (those with a public float of $700M+).
The Big 4 audit firms are built on a brand of trust — otherwise companies would go to all the other cheaper audit firms. Arthur Andersen (a former big audit firm) was destroyed because of lost trust.
Super Micro hired EY in 2023 to be their auditor. Prior to EY, Deloitte served as Super Micro’s auditor for nearly 20 years. So this would have been EY’s first audit of Super Micro, but they resigned instead…
Super Micro is now on the hunt for a new auditor and two of the Big 4 firms are off the list:
EY - since they quit
Deloitte - I have to imagine Deloitte is sweating just a little bit right now because right when EY takes over they find a bunch of issues that Deloitte didn’t find.
That only leaves PwC or KPMG of the Big 4 firms. If Super Micro hires any firm other than the Big 4 (or at least one of the largest non Big 4 firms) than investors are going to have a really hard time trusting them again. But Super Micro is a high-profile company with major allegations from EY so it is going to be hard to convince audit firms to take the risk.
I think I found Super Micro’s next audit firm….
Final Thoughts
It might be tempting to some investors to “buy the dip” on Super Micro, but I would rather stay away from a company that is being accused by its auditors of being unethical.
Trust is like the air we breathe – when it’s present, nobody really notices; when it’s absent, everybody notices. — Warren Buffett
Super Micro has clearly lost investor trust. And it has been extremely costly from a valuation perspective. Investor trust can be lost in an instant, but it can take a long time to be regained.
In the private markets it is much easier for management to deceive investors, which is why trust is even more critical. Any hint of companies trying to hide something will destroy that trust really fast.
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