Wall Street Lunch: Super Micro Computer Loses 30%

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Ernst & Young resigns as auditor of the AI server maker. (0:15) U.S. GDP up 2.8% in Q3 on strong consumers. (1:55) Eli Lilly weight-loss drug sales disappoint. (4:46)

This is an abridged transcript of the podcast.

Our top story so far. Super Micro Computer (NASDAQ:SMCI) is plunging by nearly a third after its auditor resigned.

Ernst & Young sent the members of the audit committee of the board of directors a letter of resignation on October 24, the AI server maker said in a filing.

“Although the Company recognizes EY’s decision is final, it disagrees with EY’s decision to resign as the Company’s independent registered public accounting firm – the Special Committee has not yet obtained all information relevant for the Review and has not concluded the Review,” Super Micro said. “Nevertheless, the Company has taken the concerns expressed by EY seriously, and will carefully consider the findings of the Special Committee and any remedial or other actions recommended by the Special Committee following conclusion of the Review.”

Super Micro said the chair of the audit committee discussed the reasons for EY’s resignation and has started to look for a successor independent registered public accounting firm.

The Charles Liang-led company added it “does not currently expect that resolution of any of the matters raised by EY, or under consideration by the Special Committee… will result in any restatements of its quarterly reports for the fiscal year 2024 ending June 30, 2024, or for prior fiscal years.”

Concerns about the company’s financial statements cropped up in late August, when Hindenburg Research issued a report that it was short Super Micro’s shares. A day later, Super Micro said it was delaying its annual 10-K filing.

Analysts at Needham suspended coverage on Super Micro today after the investment firm had previously given the company a Buy rating.

They said, “Not only does Ernst and Young’s resignation raise considerable questions about the validity of Supermicro’s current and past financial statements, but it also raises significant questions about Supermicro’s corporate governance and management’s commitment to integrity and ethical values.”

On the economic front, U.S. growth continues to chug along, helped by the resilient consumer.

GDP rose at an annual rate of 2.8% in Q3, down slightly from 3% in Q2 and the 3% consensus.

The growth reflected continued strong consumer spending on both goods and services, as well as increases in exports and federal government spending. Personal consumption expenditures, commonly known as real consumer spending, rose 3.7%, accelerating from 2.8% in Q2 and the strongest since Q2 2023.

The core inflation rate dropped to 2.2% from 2.8% in the previous quarter.

Mark Zandi, chief economist at Moody’s Analytics, says: “The economy posted another great quarter… Consumers continue to spend and businesses invest strongly. And all this growth is happening with unemployment holding steady at a low near 4% and inflation moderating to the Fed’s 2% target.”

“This suggests the economy’s potential growth is also a strong near 3%, thanks to immigration and healthy productivity gains. It is to hard to see the economy performing better.”

Also this morning, ADP said private nonfarm payrolls jumped 233,000 in October, higher than the 115,000 consensus. Annual pay gains for those staying in their jobs were 4.6%, down from 4.7% in September.

The ADP numbers aren’t a good predictor of the official jobs figures, though.

Michael Brown, senior strategist at Pepperstone, says: “On the whole, today’s data re-affirms that the US is indeed still on course for a ‘soft landing’, with growth remaining resilient, as price pressures continue to subside. Consequently, the FOMC are set to continue removing policy restriction, continuing with a 25bp cut at next week’s meeting, with further such cuts likely at every subsequent meeting, until policy returns to a neutral stance next summer.”

Among the big earnings movers

AMD (AMD) is lower. The chipmaker offered up stronger-than-expected third-quarter results, but concerns about its fourth-quarter guidance have cropped up on Wall Street, suggesting that the AI bar “remains high” for now.

Morgan Stanley analyst Joseph Moore said: “We remain impressed by AMD’s progress in all markets, especially AI—$5B in the first year of a brand-new product is a good achievement. But we have also highlighted that expectations are even higher, and unless the view is that AMD can take market share in (calendar year) ‘25, which we do not forecast, there won’t likely be much sequential growth through the year.”

Alphabet (GOOG) (GOOGL) is up after it topped profit and revenue expectations, driven by better-than-expected growth in subscriptions/platforms/devices and Google Cloud.

Citi reiterated its Buy rating and said it was incrementally positive on shares and pointed out that Google Search & YouTube revenue growth highlighted continued advertiser adoption of its monetization tools as query growth evolves with AI Overviews and broader GenAI search tools.

Eli Lilly (LLY) is under pressure, sending ADRs of its rival Novo Nordisk (NVO) lower after sales from its new GLP-1 class of weight loss drugs disappointed.

Mounjaro, indicated for diabetes, added $3.1 billion to the topline from $1.4 billion in the prior-year period compared to $3.6 billion projected by analysts. Meanwhile, LLY’s weight loss therapy Zepbound brought in $1.3 billion, missing $1.6 billion consensus.

Shake Shack (SHAK) is rallying to a 52-week high after a strong Q3 earnings report that featured revenue growth of 14.7%, same-Shak sales growth of 4.4%, and a 28% jump in adjusted EBITDA.

On the guidance front, the burger chain sees Q4 revenue of $322.6 million to $327.0 million (midpoint $324.8 million), vs. the consensus estimate of $323.9 million.

And Garmin (GRMN) topped the gainers board as it beat expectations, which led to another upward revision to guidance.

It boosted the 2024 revenue outlook to $6.12 billion from previous guidance of $5.95 billion and the EPS estimate to $6.85 from $6.00, both comfortably topping estimates of $5.99 billion and $6.08. The company’s gross margin is now expected to be 58.5, up from 57.0%, and its operating margin is 24.0%, up from 21.3%.

In other news of note, Robotaxi company Waymo announced that its Waymo One service is now providing over 150,000 paid trips and driving over one million fully autonomous miles every week.

“The future is here, it’s growing, and it’s taking riders safely to their destinations every day,” read the update from Alphabet’s autonomous driving business.

It was just in August that Waymo confirmed that the autonomous vehicle specialist has surpassed 100,000 trips per week.

And in the Wall Street Research Corner, Oppenheimer casts its eye on capital markets stocks after the group (KCE) has cleared major resistance compared to the cap- and equal-weighted broader market. The group is up 31.47% year-to-date and up 7.72% in the past month.

Technical analysts said: “While market conditions can be considered near-term overbought, the industry remains a top buy idea both now and on a market setback. The broadness of bottom-up strength adds to our conviction.”

Their top of the group are:

Affiliated Managers Group (AMG) – Buy dips following multi-year breakout.

Blackstone(BX) – Breakout extending back to 2021.

CBOE Global Markets (CBOE) – Bullish consolidation range resolving higher.

Goldman Sachs (GS) – Bullish consolidation range resolving higher.

Morgan Stanley (MS) – Buy dips following multi-year breakout

Nasdaq (NDAQ) – Breakout intact and positioned to resume.

Blue Owl Capital (OWL) – Buy dips following breakout.

And Raymond James Financial (RJF) – Buy dips following multi-year breakout.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.