Shares of EHang Holdings (EH -2.41%) 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 resonated, sending the stock plummeting on nearly eight times the stock's normal daily volume.
EHang is developing an autonomous air taxi, and the company has captured investor interest in recent weeks. The stock was up more than 450% for the year as of earlier this week, but that all changed on Tuesday after Wolfpack put out its report.
The research firm accuses the company of being "an elaborate stock promotion," built largely on what it claims is sham sales contracts with parties that Wolfpack says appear "to be more interested in helping inflate the value of its investment" than buying products.
Wolfpack said that based on government records and credit reports, it believes EHang's primary customer is an entity called Shanghai Kunxiang Intelligent Technology. But Wolfpack said its "behind-the-scenes photographs" and visits to facilities "lead us to believe that Kunxiang signed sham sales contracts to benefit its investment stock price."
Reports critical of a company, just like reports that are bullish, should not be taken at face value. Some are on target, some are not, and investors should always read past the headlines. In this case, there appears to be enough to Wolfpack's allegations to at least merit caution, which explains the sell-off.
Even without the Wolfpack report, EHang shares appear to have gotten ahead of themselves, so some of the dramatic decline could simply be profit-taking after an impressive run higher. Either way, I'd advise investors to watch this play out from the sidelines for now to see what more comes out about Wolfpack's allegations.