Super Microcomputer (SMCI -11.87%) stock has taken a big hit in Thursday trading. Shares of the server specialist company were down 10.8% as of 2:45 p.m. ET. Shares fell as much as 18.6% in early trading for the day, and trading was suspended due to high volatility.
This morning, the Wall Street Journal published a report that the US Department of Justice (DOJ) has launched an investigation into Supermicro. The investigation comes after short seller Hindenburg Research released a report alleging poor accounting practices and structural weaknesses in the business.
Supermicro stocks face new bearish factors
According to the report, lawyers from the San Francisco-based U.S. Attorney’s Office are in contact with people connected to the supermicrocomputer to gather information about the company. The report’s authors suggested that the investigation appears to be related to accusations of accounting violations from former employees.
News that the Justice Department may be investigating the company comes on the heels of a report released in late August by Hindenburg Research that claimed to have found new evidence of accounting manipulation by Supermicro. The company previously paid a $17.5 million fine to the Securities and Exchange Commission (SEC) for allegedly prematurely recording revenue and understating expenses. In addition to raising accounting concerns, Hindenburg also said Supermicro’s core business has significant weaknesses and lacks meaningful competitive differentiation.
Has the bearish sentiment towards supermicrocomputer stocks been overblown?
Reports suggesting that Supermicro is under investigation by the Department of Justice are understandably causing today’s growing bearish mood on the company’s stock, but investors may be wondering if Hindenburg Research’s brief initial note could be biased. You should understand that you may have. As a short seller, Hindenburg stands to profit when the value of the stocks he bets on falls.
So far, there has been no confirmation that the Justice Department is investigating Supermicro, and it remains unclear whether the core arguments in Hindenburg’s report hold up. It’s not surprising that the early stages of the investigation are underway, given that the Justice Department has recently taken a tougher stance against big tech companies. But that doesn’t necessarily mean the server specialist did something wrong.
There has been a significant increase in uncertainty surrounding the company over the past few months, but investors should note that important details have not yet been revealed.
Keith Noonan has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
