What happened

Shares of AgEagle Aerial Systems (UAVS -0.98%) traded down as much as 20% on Thursday after a short-seller issued a report calling the company "a pump & dump scheme" designed "to defraud U.S. investors."

We've chronicled AgEagle's meteoric recent rise. At least one market watcher is questioning the foundation those gains were built on.

UAVS Chart

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So what

AgEagle is a drone manufacturer that for most of its existence has focused on UAVs for agriculture, including some contracts helping states monitor and regulate legal marijuana production. A year ago the company was a penny stock, valued by the market at less than $10 million. But that all changed in 2020 when investors bought in to talk that the company could be working with Amazon on a retail delivery drone.

In a report released Thursday, Bonitas Research threw cold water on that excitement. The firm, which is short AgEagle shares, says the Amazon rumor was sparked by a promotional video first uploaded by the daughter of AgEagle founder and former chairman Bret Chilcott.

A drone hovers over a field.

Image source: Getty Images.

"We have found no evidence of any 'major e-commerce customer' or any drone technology credited to AgEagle other than reference to the promo video leaked," Bonitas wrote.

The firm also notes that an Amazon spokesperson in late 2020 told the Wichita Business Journal that the company has no dealings with AgEagle.

Bonitas also claims that insider ownership of AgEagle declined dramatically over the past year.

Now what

AgEagle representatives did not respond to requests for comment. Allegations made in short reports often take time to play out, and it is tough to say for sure what is really going on, but there is ample reason for investors to avoid this stock even without Bonitas' commentary.

This is a company that generated just $1.35 million in revenue in the 12 months ending last September, but which is valued by the market at more than $670 million even after Thursday's sell-off. I'd argue that even if Bonitas is off in its analysis and the potential for AgEagle to transform itself into an e-commerce delivery drone maker is real, much of that potential is already priced into the shares.

There is too much risk in these shares relative to the potential reward even without the noise of the short report.