Shares of Ebang International Holdings (EBON -1.96%) fell sharply on Tuesday morning after Hindenburg Research published a short report on the company, alleging it's secretly making off with investors' cash. As of this writing, the company hasn't publicly responded to Hindenburg. As of 10 a.m. EDT, Ebang stock was down 20%.
At the risk of oversimplifying the lengthy report by summarizing, Hindenburg questions Ebang's business. It notes the company's history of new product and service announcements, frequently followed by stock offerings. Despite raising well over $100 million from its initial public offering (IPO) last year and subsequent follow-on offerings, it keeps finding itself in need of more cash. Hindenburg believes the money is being used for things other than its expressed purpose, including benefiting insiders and their relatives.
Needless to say, these allegations against Ebang International are serious if true. Hindenburg clearly believes they are and has taken a short position as a result. When you short a stock, you make money when it goes down. And if Hindenburg's report is proven correct in time, then it most assuredly will go down in the long term.
Short sellers aren't viewed kindly these days by a large number of retail investors. Many investors, especially younger investors, believe it's unethical to short a stock. Furthermore, they rightly point out a potential conflict of interest. As we're seeing right now, Hindenburg Research is influential enough to move the stock today by simply publishing its report. Therefore, it's likely already profiting.
However, any response by Ebang International could be seen as a potential conflict of interest by the same logic. You expect a short seller to have a negative opinion. You also expect the company's management to be positive.
Therefore, in my opinion, it's best to try to set aside emotions and analyze Hindenburg's report and any future rebuttal by Ebang International at face value. If Hindenburg's report is inaccurate or exaggerated, Ebang's business results will bear that out in time. Shareholders with a long-term investing period can afford to endure today's volatility. However, if you have the time, it is worthwhile to systematically examine Hindenburg's claims to see if they hold water.