What happened

Shares of radio frequency identification (RFID) solutions provider Impinj (NASDAQ:PI) tumbled on Tuesday, after an analyst downgraded the stock. Impinj had soared 230% over the past year through the market close on Monday. The stock was down about 10% a 3:15 p.m. EDT.

So what

Pacific Crest analyst Brad Erickson lowered his rating on Impinj to "sector weight" from "overweight," with valuation the main concern. Impinj stock has soared in recent months as investors have grown increasingly optimistic about the potential for its RFID chips. The stock soared following the announcement that Amazon.com was buying Whole Foods on speculation that the e-commerce giant might use the company's products to make its stores more efficient.

The words "Impinj delivers item intelligence for the Internet of Things," hovering above a digital rendering of the globe.

Image source: Impinj.

Erickson believes that Impinj's pipeline of potential customers is stronger than ever, but also that the valuation has gotten out of control. The risk-reward profile is no longer favorable, according to the analyst. Before Tuesday's slump, Impinj stock traded for more than 10 times 2016 sales. The company produced a small net loss last year.

Now what

Analyst upgrades and downgrades should usually be ignored. In this case, the downgrade was due to something that Impinj investors already knew: The stock is expensive. There's no question that the valuation is baking in a lot of growth.

Ultimately, the fundamentals and future potential, not analysts' opinions, should be the determining factors for investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.