Why EHang Holdings stock plunged on Tuesday
Actions of EHang Holdings (NASDAQ: EH) fell 62.7% on Tuesday after the Chinese “flying car” company was the subject of an unfavorable report from short seller Wolfpack Research. The report sounded, knocking the stock down to nearly eight times the stock’s normal daily volume.
EHang is developing a autonomous air taxi, and the company has garnered investor interest in recent weeks. The stock was up over 450% for the year earlier this week, but that changed on Tuesday after Wolfpack released its report.
The research firm accuses the company of being “an elaborate inventory promotion,” based largely on what it claims to be mock sales contracts with parties that Wolfpack says “appear to be more interested in helping out. inflate the value of his investment “only to buy products.
Wolfpack said that, based on government records and credit reports, he believes EHang’s main customer is an entity called Shanghai Kunxiang Intelligent Technology. But Wolfpack said his “behind-the-scenes photographs” and visits to the facilities “lead us to believe that Kunxiang signed bogus sales contracts for the benefit of his investment course.”
Reports critical of a business, just like bullish reports, should not be taken at face value. Some are on the right track, some are not, and investors should always read beyond the headlines. In this case, there appear to be enough Wolfpack claims to at least merit caution, which explains the sale.
Even without the Wolfpack report, EHang shares appear to have gotten ahead of themselves, so part of the dramatic decline could simply be profit taking after an impressive rise. Either way, I would advise investors to watch this game from the side for now to see what more emerges on the Wolfpack allegations.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.