An investment in Aterian (NASDAQ:ATER) stock doesn’t make much sense from a fundamental perspective. Being that this is 2021, you can probably guess I’m about to say retail investors on Reddit and Twitter (NYSE:TWTR) are doing their best to make sure that fundamentals don’t matter.
Another way of saying this is to note that short interest in Aterian shares is extremely high at present. Retail investors hope to affect a short squeeze or at least send ATER stock back to earlier 2021 prices. Predicting a short squeeze or even price direction in Aterian is difficult, if not impossible with retail investor dynamics factoring in.
I’ll simply lay out a case here of why you shouldn’t invest and let you decide what to do.
Follow The Tweets on ATER Stock
Let me share some Tweets that exemplify some of the social media and meme stock logic around companies including Aterian. Most of the responses point to the same idea: ATER stock has to go up because they’re heavily shorted. Prices for the shares were higher earlier in the year. Therefore, Twitter logic dictates that they must return to those former levels.
The general consensus is that Aterian should somehow retest former highs well above $30 earlier this year. As with most meme stocks there’s little to no discussion of why Aterian fell in the first place.
But for investors who care to understand why Aterian fell so dramatically, there’s a simple answer. The company reports sustained, volatile losses.
In the four quarters between June 31, 2019 and Mar. 31, 2020 Aterian reported consistent net losses between $14 to $18 million.
Those losses decreased to below $3 million in the second and third quarters of 2020. Then they compounded to a loss of $44 million in Q4. Its most recent earnings report shows that it lost $36 million in the quarter ended June 30.
So it isn’t difficult to see why the market has soured on Aterian shares. That doesn’t matter much. It seems that the sole metric driving retail investors is current short interest.
It is currently extremely high at 29% according to MarketBeat. That interest has sent prices soaring above $11 from near $3 in late August. The rub is that analysts believe that it is worth less than $10.
There’s no reliable insight to be had there. Prices could move up, but most logical assumptions are that they won’t.
For those who haven’t been persuaded by Aterian’s poor performance and still want to chase the squeeze, at least understand what the business model is.
Third Party Acquisitions
Aterian acquires Amazon (NASDAQ:AMZN) Fulfillment by Amazon (FBA) companies that have built brands on Amazon’s platform. It has 12 brands under its umbrella and more than 3,000 stock keeping units.
The company focuses on consumer goods including home and kitchen appliances, beauty products and consumer electronics.
And it has recorded strong compound growth in revenues over the past five years, at 72%. However, as mentioned, its losses are getting larger and larger despite the top line growth.
Competing on the Amazon platform as a private label consumer good is not easy. There are multiple competing products often sourced from the same manufacturer with nothing differentiating them except branding.
Competing against other sellers is quite arduous. But there’s also the issue that Amazon is collecting reams of data on those products, which it then uses to release its own branded versions of products.
All of that leads to a very competitive landscape which often favors very few winners at the expense of many more losers. Physical product margins are low, and once you factor in the costs of advertising to rank products, margins can and do disappear. ATER stock may very well be suffering these issues.
I don’t know precisely what is happening at Aterian but I do know it continues to report increasing losses.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.