Aterian Is Likely to Fall Further Due to Dilution Concerns

Editor’s Note: This article was updated on Oct. 28, 2021, to update cash and liability numbers. 

Aterian (NASDAQ:ATER) stock is likely to fall further given its need to raise more capital with ongoing losses. This is a change in my previous position on ATER stock from my last article on Sept. 30.

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Since then, I have reviewed the situation with the company’s finances as well as several articles have in Seeking Alpha. In fact, one of those authors as well changed their mind. They make it clear that the company is likely to need a further capital injection.

This capital raise will also be on top of the huge dilution granted to one of its lenders. In fact, the Seeking Alpha analyst that changed its mind, Moat Investing, projected that this dilution could be on the order of 40% to 60%. This will come from both shares and warrants that are to be issued to its lender.

Where Things Stand

As it stands, the company is still losing money even after giving up huge amounts of dilution to its lender. That might require that the company to issue more capital due to its ongoing shipping losses.

For example, last quarter the company had a loss before income taxes of $36.3 million. In addition, for the six months to June 30, its operating cash flow was a loss of $32.836 million. After capital expenditures, the free cash flow loss was $32.9 million. This can be seen in Aterian’s Consolidated Cash Flow Statement.

That is completely unsustainable for a company like Aterian with cash of just $61.9 million and current liabilities of $161.7 million as of June 30, 2021. Some of those liabilities might have been taken care of with the lender share deal, but it does still does not account for the ongoing cash flow losses.

Simply put, the company needs at least another $50 million or maybe $60 million. That represents another 16% to 19% dilution to the existing $320.8 million stock market value. And this is before we know the full value of the dilution (i.e., new shares to be issued) to the existing lender.

In other words, the company is likely going to have to issue more shares that will push ATER stock down easily another 20%. That is after the 40% to 60% dilution from the lender share and warrant issues.

Where This Leaves ATER Stock

On top of this, we don’t know whether the company is still going to have ongoing shipping cost issues for its retail products. As you might suspect, that means investors are going to scrutinize the upcoming Q3 earnings release along with the balance sheet, and cash flow statements. This will not happen until the second week of November or later if past earnings release trends hold up.

Analysts on the buy-side are still positive on the stock. For example, Seeking Alpha indicates that five analysts have an average price target of $13.00 per share. TipRanks.com reports that four analysts that have written on the stock in the last three months have an average price target of $12.50. Both of these sets of targets are significantly above the present price of $6.68 per share as of Oct. 26.

But I am still skeptical. I won’t be able to determine the price target until I know the full extent of the dilution possible from the shares to be issued to the lender. Right now that is indeterminable.

In addition, the Q3 earnings may show substantial losses due to shipping costs increases and delays.

What Investors Should Do With ATER stock.

Therefore, most patient investors will likely take their time with ATER stock. The point is there is a high likelihood of further declines in the stock. This could be from the large number of shares given to the lender and also for a new capital raise.

Most investors will probably wait until that dilution is passed, along with any further shares that will be needed to be issued due to its ongoing losses. In other words, don’t be in a rush to buy ATER stock.

On the date of publication, Mark R. Hake 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. 

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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