Super Micro Computer Inc (NASDAQ:SMCI)

Super Micro Computer Inc (NASDAQ:SMCI) has faced significant challenges recently, including a short seller report, delayed financial filings, the risk of delisting, and an auditor resignation. Amid this turmoil, KC Rajkumar of Lynx Equity Strategies suggests that the company may need to eliminate the costly NVIDIA (NASDAQ:NVDA) Blackwell program from its shipment pipeline.

Rajkumar points out that Super Micro's inventory surged to $4.4 billion at the end of FY2024, over three times the amount from the previous year, while revenue only doubled. This imbalance affected margins, profitability, and cash flow, making the company vulnerable following the auditor's resignation.

> "The abrupt hit to inventory arising from high cost of liquid-cooled kits for H100/H200 directly impacted margins and profitability," Rajkumar noted. He mentioned that cash flow from operations for FY24 reported negative $2.5 billion compared to positive $663 million a year prior. Despite raising approximately $1.6 billion through a convertible issue and an additional $1.75 billion through a secondary offering, the company exited FY2024 neutral on a net cash basis.

To ensure long-term survival, the analyst suggests that Super Micro may have to drop the more expensive Blackwell program from its shipments, which would likely lower the FY2025 revenue guidance. Rajkumar highlighted that the FY25 revenue guidance of $26 billion-$30 billion includes revenue from Blackwell in the second half of the fiscal year. “We believe the company’s weakened financial position leaves it with few choices,” he added.

He believes this move could enhance gross margin in the latter half of the fiscal year, potentially benefiting the stock. While unaware of the specifics behind the accounting issues that led to the auditor's resignation, the analyst speculates that management’s handling of abrupt changes to cash flow and other financial metrics might have played a role.

Overall, Rajkumar believes that SMCI must tackle its unsustainable inventory and profitability to stabilize. Scaling back its Blackwell objectives due to limited funding and challenging financial conditions could allow the company to concentrate on the H100 market and secure long-term stability.

Super Micro is anticipated to provide a business update for the first quarter of 2025 after today’s market close, and investors are eager to learn more about its ongoing issues and potential solutions.