Could This Move by Nvidia Protect It From Super Micro Computer's Woes?

Super Micro Computer (SMCI 6.42%) and Nvidia (NVDA 2.84%) have both been winners during this artificial intelligence (AI) boom. Nvidia makes graphics processing units (GPUs) and other related products and services, while Super Micro Computer, also known as Supermicro, incorporates GPUs -- those of Nvidia and other chip designers -- into its server systems for data centers. This has resulted in triple-digit sales growth for both companies in the latest quarters; ongoing high demand is a positive sign for the future.

But in recent times, Supermicro has stumbled. A short report in August alleged troubles at the company, and at the same time but in an unrelated move, Supermicro delayed its 10-K annual report. A few weeks later, The Wall Street Journal reported that the Justice Department was investigating the company. Supermicro's problems intensified last month when the firm's auditor, Ernst & Young, quit, citing concerns about the company's financial reporting.

Now, it's natural for investors to worry about the impact of these troubles on Nvidia due to the companies' relationship. But could one particular move by Nvidia protect it from Supermicro's woes? Let's find out.

The Supermicro situation

First, a bit more detail about Supermicro's recent situation, and then I'll talk about how the company works with Nvidia. A short report in late August set off the string of difficulties at Supermicro, with Hindenburg Research alleging several issues, including "glaring accounting red flags." Supermicro responded, calling the statements "false or inaccurate."

Meanwhile, Supermicro delayed the filing of its 10-K annual report but informed customers and investors that it didn't expect any significant changes to fourth-quarter or annual-earnings figures. But the pressure still is on for Supermicro to complete the 10-K: Nasdaq sent the company a non-compliance letter due to the delay, and the company has until later this month to file or submit a plan to regain compliance with listing rules. So, at this point, the company faces the possibility of delisting.

As for The Wall Street Journal report about a possible Justice Department probe, Supermicro declined to comment.

Finally, late last month, Ernst & Young resigned as auditor of Supermicro. Ernst & Young stated that it was no longer "able to rely on management's and the Audit Committee's representations," and it was "unwilling to be associated with the financial statements prepared by management."

From the start of Supermicro's problems with the Hindenburg report through today, the stock has lost 52%.

Nvidia and Supermicro

Now, let's consider how Nvidia fits into the Supermicro picture. As Supermicro states in its 2023 annual report, large equipment orders "may require greater commitments of working capital, which may require increased borrowings under our credit facilities to fund purchases of key components." And in recent earnings reports, Supermicro noted ongoing high demand for its rack scale solutions incorporating Nvidia's GPUs.

The risk here, considering Supermicro's current troubles, is the company could have difficulty increasing borrowing to fund orders, and this may impact Nvidia's revenue at least in the near term. The situation is particularly noteworthy today as Nvidia prepares to launch its Blackwell architecture, a new platform in high demand.

Nvidia's latest move

So, should we worry about Nvidia right now? Well, the top chip designer may be taking the necessary steps to avoid significant supply chain problems and impact on its sales. Nvidia is said to be shifting Supermicro orders to other vendors, according to a DigiTimes Asia article.

This is positive as it should minimize impact on sales and keep the supply chain flowing, but it's possible Nvidia will see some near-term effects. After all, Supermicro is one of the leading equipment makers, and considering demand for Blackwell surpasses supply, every player involved in bringing Blackwell to customers holds a key role.

Still, it's important to take a long-term view of this situation, and if we do this, there's reason to be confident about Nvidia even as Supermicro navigates difficult waters. If the DigiTimes report is correct, Nvidia is making the right moves, and any potential impact on Nvidia's revenue or delay in order deliveries in the short term should be limited thanks to this sort of proactive step.

Even better, potential impact today won't change Nvidia's bright, long-term picture. Nvidia's products and services are in high demand, and the company works with a wide range of players -- from equipment makers to cloud-service providers -- to ensure customers have access to them. All of this means that if Nvidia's stock slips on Supermicro's recent troubles, it represents a fantastic buying opportunity.