The collapse of Super Micro's $50 billion stock highlights the dangers of AI hype.

• Super Micro has lost about two-thirds of its value since being added to the S&P 500 in March, and now faces the possibility of Nasdaq delisting.
• On Wednesday, Super Micro announced that Ernst & Young had resigned as its auditor, which led to a recent decline.
• Super Micro's compliance with Nasdaq is being hindered by this development, according to Wedbush analysts, who wrote about it in a report.

In March, the stock was added to the S&P 500 after an impressive run that increased its value by over 2,000% in just two years, surpassing even the most impressive gains.

As it turned out, S&P was calling the top.

In the two weeks following the announcement of index changes, Super Micro reached its highest closing price of $118.81 and had a market cap of nearly $70 billion. However, since then, the stock has fallen 72%, causing the valuation to drop below $20 billion, which marks the first significant indication in the public markets that the hype surrounding artificial intelligence may not be entirely justified.

Nvidia-based clusters of servers for training and deploying AI models are primarily built by Super Micro.

On Wednesday, the stock of Super Micro dropped 33% after its auditor, Ernst & Young, resigned, stating that it was unable to endorse the financial statements prepared by management. As a result, Super Micro is now at risk of being removed from the Nasdaq stock exchange, and has until November 16 to regain compliance.

Analysts at Mizuho, who have given the stock a hold rating, wrote in a report on Wednesday that there is a higher risk of delisting without an auditor and the potential challenge of obtaining a new one.

In March 2023, Super Micro replaced Deloitte & Touche with Ernst & Young as its new accounting firm.

Super Micro has stated that it disagrees with E&Y's decision to resign and is actively working to choose new auditors.

Neither Ernst & Young nor Deloitte responded to requests for comment from their representatives.

For most of Super Micro's 30-year history, the company remained unknown, operating as a small, unnoticed data center business in Silicon Valley.

Since the launch of ChatGPT by OpenAI in late 2022, there has been a surge in investment in AI processors, with Nvidia being a major supplier. In addition to Nvidia, Super Micro has also benefited from this boom, by incorporating powerful graphics processing units (GPUs) into customized servers.

Despite not filing official financial disclosures with the SEC since May, Super Micro's revenue has doubled in each of the prior three quarters.

Wall Street's mood on the company has shifted dramatically.

In March, the S&P announced index changes, resulting in a 10% drop in Super Micro's stock on six separate occasions. The most significant decline occurred on Aug. 28 when the shares plummeted 19% after Super Micro announced it would not submit its annual report to the SEC on time.

The assessment of SMCI's internal controls over financial reporting as of June 30, 2024, is not yet complete, and additional time is required for management to complete it, the company stated.

A short seller, Hindenburg Research, revealed a short position in the company and stated in a report that they found "new evidence of accounting fraud."

'Clock ticking'

Super Micro announced that it had received a notification from Nasdaq stating that the company was not in compliance with the exchange's listing rules due to the delay in filing its annual report. According to Nasdaq's rules, Super Micro had 60 days to either file its report or submit a plan to regain compliance. Based on this timeframe, the deadline would be mid-November.

In 2018, Super Micro was previously delisted by the Nasdaq.

Wedbush analysts see reason for worry.

The analysts, who recommend holding the stock, wrote in a report that the missed deadline to file the 10K and the ticking clock pose a significant hurdle for SMCI to file in time and avoid delisting.

On Wednesday, Super Micro experienced its steepest selloff since 2018, prompting the company to release a press statement announcing a first quarter fiscal 2025 business update on Tuesday, Nov. 5.

That's Election Day in the U.S.

According to Super Micro's spokesperson, the company does not anticipate that the issues raised by Ernst & Young will lead to any restatements of its quarterly financial results for the fiscal year ended June 30, 2004, or for any prior fiscal years.

The evolving incident involving Super Micro has the potential to negatively impact S&P Dow Jones, as the home appliance company's shares have been underperforming the broader market since its inclusion in the S&P 500.

The inclusion of a stock in the S&P 500 can cause it to increase in value, as money managers tracking the index are required to purchase shares to reflect the changes. This means that pension and retirement funds have more exposure to the index's members. On March 4, Super Micro experienced a 19% increase in stock price following the announcement.

S&P Global's spokesperson stated that the company does not provide comments on specific constituents or index changes and referred to its methodology document for general guidelines. The main criteria for being included are positive GAAP earnings in the past four quarters and a market capitalization of at least $18 billion.

At any time, S&P can make unplanned changes to its indexes due to corporate actions and market events.

Kevin Barry, the chief investment officer at Cantata Wealth, advises that more attention should be paid to a stock's volatility when adding it to a heavily followed index, particularly given that technology already makes up approximately 30% of its weight.

"The likelihood of a stock experiencing a significant increase in value, such as 10 or 20 times in a year or two, and then experiencing a sudden drop in value, is very high, according to Barry, the co-founder of Cantata. This occurs when a stock moves from a low-risk sector to a higher-risk sector, with technology already being the largest sector in the index."

— CNBC's Rohan Goswami and Kif Leswing contributed to this report

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