Drop in Super Micro Computer Stock Explained

Super Micro Computer (SMCI) saw a significant decrease in its stock price over the past week, closing Friday down by 13.3% compared to the previous week, according to data from S&P Global Market Intelligence.

The decline in Supermicro's stock was influenced by recent interest rate news from the Federal Reserve, prompting investors to reassess their positions. While the Fed implemented a widely anticipated 25-basis-point interest rate cut, comments made by Chair Jerome Powell unsettled many investors.

Market Response to Federal Reserve News

The latest Federal Reserve meeting, held on Wednesday, introduced its third rate cut since September. This adjustment reduced the benchmark interest rate to 4.25%, down from a recent high of 5.25%, established in July 2023. Although higher interest rates serve as a tool to combat inflation, they often lead to poorer performance in the stock market.

Previously, the Fed had indicated expectations of four rate cuts of 25 basis points each for the following year. However, after the recent meeting, the central bank revised its outlook to anticipate only two cuts in 2025. This change sparked substantial selling, particularly affecting companies with growth-oriented and speculative valuations. Supermicro's stock even dropped as much as 16.3% at one point during the week but did experience a slight recovery.

Potential Risks Ahead for Supermicro

On Friday, a report by The Information revealed that the U.S. Department of Commerce has launched an investigation into how Nvidia's advanced graphics processing units (GPUs), which are used for artificial intelligence (AI) applications, ended up in China. Due to escalating tensions between the U.S. and China, there are export bans that prevent advanced AI processors and semiconductor manufacturing equipment from being sold to China.

The report suggested that Nvidia had requested major server manufacturers, including Dell and Super Micro Computer, to investigate potential pass-through sales from customers in Southeast Asia. This investigation could pose another considerable risk to Supermicro.

Although there is no confirmation yet, there have been persistent rumors that China may have been gaining access to Nvidia's advanced processors through purchases of Supermicro servers. Additionally, in October, The Wall Street Journal reported that the U.S. Department of Justice initiated a probe into Supermicro. While speculation primarily points toward possible accounting irregularities, some investors have suggested that a breach of the export ban might also be relevant.

Supermicro has announced plans to file its delayed 10-K report by February 25. This report will be closely scrutinized. If the company’s filings reveal no substantial restatements of earlier financial results, it could potentially see a surge in share price. Conversely, if a new financial auditor identifies that previously reported results require significant downward adjustments, the stock could decline further.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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