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Aterian’s Weaknesses More Than Offset Its Strengths

ATER stock - Aterian’s Weaknesses More Than Offset Its Strengths

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While Aterian (NASDAQ:ATER) has multiple strengths and the valuation of ATER stock is quite reasonable, I don’t think investors should buy the firm’s shares yet. The main factors keeping me cautious are its failure to steadily improve its EBITDA over the years, its large amount of stock-based compensation and its status as a meme stock.

As I noted in my October 2021 column on Aterian, I think two of the company’s products have a great deal of potential. Specifically, I wrote that its Artificial Intelligence Marketplace E-commerce Engine, or AIMEE, may enable the company to launch “revolutionary” products. AIMEE also allows the company to automate many processes, saving it significant amounts of money in the process.

Another promising offering launched by Aterian in October is DealMojo, which enables Amazon’s (NASDAQ:AMZN) vendors to “connect directly with publishers, influencers and other affiliate marketers.” It sounds unique and useful for the many individuals and companies who sell products on Amazon.

Also encouraging are Aterian’s efforts to combat its supply chain issues. The company’s CEO, Yaniv Sarig, noted on its Q4 earnings call the company has been able to convince a number of its partners, including Amazon and XPO Logistics (NASDAQ:XPO), to charge more affordable shipping rates.

What’s more, Aterian has been able to increase its prices by about 20%, according to Sarig. Its success indicates it has some pricing power and can continue to use price hikes as a means of offsetting its higher costs.

As for the valuation of ATER stock, its shares are trading at a trailing price-to-sales ratio of just 0.79x, according to Yahoo! Finance. Given the company’s high potential and its track record of increasing revenue, the shares are fairly cheap.

Over the years, Aterian has not been able to steadily increase its EBITDA. Last year, its EBITDA loss came in at $46.4 million compared to its EBITDA loss of $20.9 million in 2020. The latter marked an improvement versus its EBITDA loss of $54.2 million in 2019.

But in 2018, the company’s EBITDA loss was $29.2 million, worse than the $22.3 million loss it posted in 2017. So aside from 2020, when all e-commerce companies did very well, Aterian has had trouble improving its profitability.

Another issue is its high level of stock-based compensation, or SBC. The company paid out $22.7 million of SBC in the fourth quarter alone. Over the last year, I’ve noticed the stocks of companies with relatively high levels of SBC tend to perform quite poorly.

Finally, Aterian has apparently become a meme stock recently. As I’ve stated in past columns, I expect such stocks to weaken as the Federal Reserve raises interest rates and shrinks its balance sheet.

Given Aterian’s weaknesses, investors should keep an eye on the company to see if it develops a hot new product and/or finds ways to meaningfully improve its profitability. Until at least one of those situations arise, I’d avoid owning ATER stock.

On the date of publication, Larry Ramer 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.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

Article printed from InvestorPlace Media, https://investorplace.com/2022/04/ater-stock-weaknesses-more-than-offset-its-strengths/.

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