What happened

Shares of Vuzix (VUZI -0.72%) fell 19.3% in July, according to data provided by S&P Global Market Intelligence. The augmented reality and smart glasses stock has gone on a wild ride so far in 2021. At one point, in April, the stock was up 240% on the year. Ever since then, the stock has slowly given up these gains and is now up 55% year to date.

So what

Vuzix stock started its meteoric rise this March when it announced new contracts with a major U.S. insurance company and The Cooper Companies, a medical device manufacturer. The contract with the insurance company is for $400,000 worth of Vuzix's M400 Smart Glasses, while it is unclear how large the Cooper Companies contract is. It followed these announcements up with more press releases on future partnerships and did an $85 million public offering of common stock at a price of $20.50 per share. For reference, shares now trade at $13.70.

A person wearing augmented reality glasses touching the lenses.

Image source: Getty Images.

We got further news in May that CEO Cathie Wood's ARK Invest had taken a $10 million stake in Vuzix through its Ark Next Generation Internet ETF. ARK Invest is one of the most followed investment funds, so a lot of the volatility in Vuzix shares can likely be attributed to other investors' reactions to ARK's moves.

In the first quarter, Vuzix's revenue grew 155% year over year to $3.9 million. That is some impressive growth, but Vuzix is still hemorrhaging cash, with a net loss of $6.6 million in the quarter. A big reason for this is the company's low gross margin, which grew last quarter but is still only 28%. A low margin will make it more difficult for Vuzix to achieve profitability as it tries to scale its business.

Now what

Vuzix has been a strong recent performer, with the stock up over 200% in the last 12 months. With a market cap of $932 million, the company trades at a nosebleed price-to-sales ratio of 65, which is especially high when you consider the company's low gross margin. If Vuzix continues to grow sales at 100% or higher for the next few years, the stock might be able to fulfill this lofty valuation. But investors need to understand that an investment in Vuzix carries huge risks, and if the company doesn't execute, there is a chance the stock will do poorly over the next few years.