Aterian, Inc. (NASDAQ:ATER), a technology-enabled consumer products company, will announce its first-quarter (Q1) 2022 financial results on May 9. Contrary to the broader stock market, ATER stock has gains of 31% in 2022 and one-month gains of 131%.
Is ATER stock a buy ahead of its upcoming earnings? There are two key reasons to be bearish after this one-month rally. First, Aterian has a history of missing earnings per share (EPS) estimates by a wide margin or beating EPS estimates only by a narrow margin. The EPS estimate for Q1 2022 is negative 26 cents. For a stock to perform well in the long-term, its earnings history should be different, beating EPS estimates by far and having only moderate EPS misses. In the past five consecutive quarters, ATER stock had four EPS misses and only one beat.
The second factor in the bear case around Aterian is that the company, in its full-year 2021 results, reported that the “contribution margin declined to 10.1% from 13.5% in 2020, reflecting impacts from global supply chain disruptions and related inflation.”
The war in Ukraine has made global supply chain disruptions even worse for many products. Additionally, inflationary pressures in the U.S. market remain elevated. Inflation is at high levels in Europe, as well. I believe that Aterian probably will report a lower contribution margin, which is the difference between its sales and variable costs. What would be bad news for profitability.
In analyzing the fundamentals of Aterian, it is hard to provide a solid argument for why its shares have been outperforming the U.S. stock market. Despite the increase in revenue of 33.4% to $247.8 million in 2021 and the improvement of the gross margin to 49.2% compared to 45.6% in 2020, the company reported a wider net loss of negative $234.7 million compared to a net loss of negative $63.1 million in 2020. It lost money for the whole period between 2017 and 2021 and it is burning cash. Shareholders have been substantially diluted in the past year, with total shares outstanding growing by 120.3%.
Shares of Aterian have been popular on Reddit and its outperformance in 2022 may soon be tested with its upcoming earnings release. Avoid the stock as its financials are not strong enough to justify a sustainable move higher.
On the date of publication, Stavros Georgiadis, CFA 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.