What happened

Shares of GrowGeneration (NASDAQ:GRWG) were tumbling 12.1% as of 11:03 a.m. EDT on Friday. This marked the second consecutive day of double-digit declines for the specialty hydroponic and organic gardening retailer's stock. Friday's drop came after short-seller Hindenburg Research published an online report that warned of a potential 70% downside for GrowGeneration's shares.

So what

Hindenburg Research's online report made two primary knocks against GrowGeneration. It focused mainly on allegations about the company's management team's "extensive ties to alleged pump & dump schemes, organized crime and various acts of fraud." Hindenburg also stated that the picks-and-shovels cannabis stock trades at a frothy valuation, saying that "the stock is priced absurdly rich even under a best-case scenario." 

Man with hands on his head in front of a stock chart

Image source: Getty Images.

What should investors make of this report? First, understand that Hindenburg Research has a financial motivation to cast GrowGeneration in the worst light. Its report acknowledged that Hindenburg has shorted shares of the stock. However, it's wise to weigh the allegations and listen to what, if anything, GrowGeneration will say in response.

There's no question that GrowGeneration's valuation is very high, with shares trading at 185 times expected earnings. But it's important to put this valuation into perspective by considering the company's long-term growth prospects. With the U.S. cannabis industry continuing to expand, GrowGeneration should be able to continue growing by leaps and bounds.

Now what

At this point, GrowGeneration hasn't provided an official response to Hindenburg Research's allegations. The company could choose to come out swinging or it could remain silent. Regardless of the action taken in response to the short-seller's report, GrowGeneration's shares could be highly volatile in the coming weeks and months. 

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.