Super Micro Computer (SMCI -1.16%) faces mixed investment prospects. The company produces server components in high demand due to artificial intelligence (AI) but is also dealing with serious allegations of accounting malpractice and a probe by the Department of Justice (DOJ).

Currently, negative factors outweigh the positives, causing Supermicro’s stock to drop 60% from its peak in March. The company recently executed a 10-for-1 stock split, which typically leads to price increases, not declines.

Commoditization Risks

Supermicro’s market is crowded, with many competitors. However, its energy-efficient technology is a significant advantage, as companies seek to lower operating costs, increasing demand for Supermicro’s products.

Despite this, the company’s gross margin has shrunk due to supply chain issues with its new liquid-cooled systems. Management believes margins will improve as they ramp up production in Malaysia and Taiwan, but if commoditization occurs, they may have to lower prices, affecting profitability.

Accounting Allegations and Government Investigation

Supermicro is also under scrutiny due to allegations from short seller Hindenburg Research regarding accounting malpractice. In 2020, the SEC fined the company $17.5 million for similar issues. Although management denies the claims, the delayed filing of an important financial report raised further red flags.

While the DOJ investigates these allegations, potential investors face a dilemma. The risks include declining margins and ongoing scrutiny, yet Supermicro forecasts a staggering revenue growth of 74% to 101% for fiscal year 2025.

With a low forward P/E ratio of 14.2, Supermicro could be a very affordable growth opportunity compared to the S&P 500’s 23.7 ratio. I personally bought the dip, but limited my investment to 1% of my portfolio due to the associated risks. If you’re not comfortable with the potential for losses, there are many other solid AI stocks to consider.

There’s a strong chance Supermicro’s stock could rebound significantly, provided it addresses some of its current challenges.