- Aterian’s (ATER) history of underperforming sets up a potential short squeeze.
- Its high volatility exacerbates the potential for downward movement.
- High growth has led to accolades, bolstering its investment case.
There are a lot of reasons to believe Aterian (NASDAQ:ATER) stock is strictly one to avoid at the moment. That said, let’s find the hope in ATER stock despite the overall environment.
One of the foremost reasons it is considered risky is that it is a stereotypical growth company. 2022 is a year that hasn’t been kind to growth stocks owing to the massive inflation we are currently experiencing. The higher inflation rises, the more likely the Federal Reserve is to increase interest rates.
Historically, when that happens, growth stocks decline. That’s true because growth stocks like Aterian typically have strong top-line growth but also widening losses. Investors become less willing to direct their capital towards such companies as monetary policy becomes tighter as it did on May 4. The tighter monetary policy becomes the harder it is for growth companies to access the capital required for growth because their losses become less acceptable.
A Perfect Growth Play
Aterian is a perfect example of one such company. In 2021, its revenues increased to above $247 million from $185 million a year earlier. But its net losses of $63 million dollars in 2020 ballooned to nearly $235 million by the end of 2021.
So, it is a perfect growth play which suggests that it should be avoided presently. But it may have the ability to surprise. And that opens up the possibility for retail investors to make money off of Aterian by playing its short squeeze potential.
For that to happen traders have to bet that the stock will move downward and the stock then moves upward. That could happen when the company releases earnings. Currently less than 20% of the company’s float is shorted. That’s right near the traditional cut-off where short squeezes typically occur.
All that has to happen is for the company to surprise the market.
Aterian’s Surprise Potential
The company has already shown that it can do exactly that. Last quarter, the company was expected to produce earnings per share (EPS) figures of -27 cents per share. It surprised the market, producing an EPS of -11 cents.
So, if the company does that again this quarter then a short squeeze could ensue. Prices would rise on the EPS beat and that 20% of the float betting against the company might then have to cover their position which could trigger a short squeeze.
And even if the company doesn’t provide an EPS surprise this quarter there could be other news that triggers a sharp upward price spike. Yes, this is somewhat of a perfect storm scenario but the company and its stock are highly volatile. In market terms that’s called beta.
And according to Yahoo Finance, Aterian is a very volatile company based on its beta of 2.7. A beta of 2.7 means that the stock has the potential to move upward or downward 170% quicker than an average stock. That’s another indicator that the stock has the potential for a short squeeze to occur.
Cautious Optimism and What to Do With ATER Stock
Am I saying that retail investors should go out and bet the farm short squeeze in Aterian? No. But I think retail investors are looking for reasons to find optimism and beaten-down growth stocks like this one. In that short squeeze potential is one such reason for optimism.
That said, it’s important to understand what the company does and some of the accolades that it is recently received. The company builds and acquires e-commerce brands end cells those branded products on e-commerce sites such as Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) among others.
It’s no secret that supply chains are snarled all around the world. That doesn’t bode well for the company in getting its products to customers easily. However, Aterian recently received recognition for its growth over the last few years. That at least suggests it is a strong performer.
ATER stock is going to remain a short squeeze play and buying now could yield quick gains. Exercise cautious optimism and proceed accordingly.
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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.