Aterian Is Hard to Recommend With a Cash Crunch and a Potential Dilution

Without a doubt, investors in New York City-based Aterian (NASDAQ:ATER) have been through good times and bad times. Lately, though, it’s been mostly downhill for ATER stock.

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It wasn’t very long ago that the stock was within arm’s reach of $50. Today, it’s threatening to become a penny stock, which is informally defined as a stock trading for less than $5 per share.

Just as a reminder, Aterian is a technology-enabled consumer products company. The company uses machine learning, data analytics and natural language processing to facilitate product sales on various online marketplaces.

This certainly sounds like a high-conviction market to be involved with. At the same time, however, there are red flags that make ATER stock a tough sell — and therefore, tempting to sell.

A Closer Look at ATER Stock

There’s simply no denying it. Aterian has “meme stock” written all over it.

At least, it did in early 2021. Back then, some Reddit users were on the hunt for short-squeeze candidates — not blue-chip shares, but rather low-priced stocks that could be easily controlled.

ATER stock seemed to fit that description in January and February. Thus, we have a plausible (though perhaps not provable) explanation of why the stock rallied from $7 to $48.99 in a few weeks’ time.

There really wasn’t any news-based catalyst to account for a price move of that magnitude. So, I’ll just go ahead and credit — or blame — the Reddit crowd.

The problem is, these price pumps are often followed by drastic drawdowns. Such was the case with ATER stock, which slid during the next half-year, even touching $3 in August.

Fast-forward to late October, and the share price has recovered somewhat to $6 and change. That’s a move in the right direction, at least.

Still, hoping for Reddit traders to resuscitate ATER stock isn’t really much of an investment strategy. It’s more sensible to focus on the company itself — but if we do that, we might run into some issues.

Aterian’s Quarterly Results Were Dismal

Sometimes, InvestorPlace contributor and renowned CFA Mark R. Hake sets me straight when I’m leaning bullish on a stock.

Just as I was starting to favor an investment in Aterian, Hake hit me with a dose of reality. His article on ATER stock is, I believe, a must-read for current and prospective shareholders.

Ever the financial wizard, Hake pulled Aterian’s consolidated cash-flow statement and cited some stomach-turning stats. We’ll start off with this appetizer: last quarter, Aterian sustained a loss before income taxes of $36.3 million.

Next, we’ll extend the time frame: for the six months ended June 30, Aterian’s operating cash flow was a loss of $32.836 million.

Finally, after factoring in the company’s capital expenditures, Aterian’s free cash flow loss was $32.9 million.

A Debt Threat and a Dilution Solution

I did some digging as well, and found that Aterian was bragging that the company had “reached an agreement with its lender, High Trail, to pay down its outstanding secured term debt in an aggregate principal amount of $66.3 million plus accrued and unpaid interest.”

$66.3 million in debt isn’t something to be proud of, in my humble opinion. Factor that figure into the overall equation, and then consider Hake’s aforementioned fiscal figures, and you’ve got a recipe for disaster.

Then, there are the share dilution concerns.

In early October, one observer noted that Aterian’s number of shares outstanding more than doubled over a 14-month period to 38.58 million.

Moreover, with Aterian’s ongoing cash flow losses in mind, Hake suggested that the company “is likely going to have to issue more shares that will push ATER stock down easily another 20%.”

If Hake’s proposed scenario plays out, even the Reddit crowd might not be able to rescue Aterian’s hapless shareholders.

The Bottom Line on ATER Stock

It’s with no joy that I report these red flags. Rather, I’m just trying to alert people to Aterian’s possible issues.

Alas, ATER stock’s best days may be in the rear-view mirror. The situation is likely to deteriorate from here, I fear. Out of respect for Hake’s take and the daunting data, I simply can’t recommend Aterian as an investable business now.

Hopefully, I’m dead wrong on this – but until we find out, investors should proceed with caution.

On the date of publication, David Moadel 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 Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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