Aterian, formerly known as Mohawk Group, uses artificial intelligence and machine learning algorithms to identify product gaps in the e-commerce marketplace and then quickly develops, markets, and sells products to fill those gaps.
The firm’s AI-driven consumer product development business model has all the hallmarks of a disruptive innovation so why is Aterian stock dropping?
Let’s pull the covers back to find out what’s been working well and poorly.
Aterian Has Been Growing Via Acquisitions
If you’re new to the company and wondering what it does, Aterian uses proprietary algorithms to spot gaps in the market for consumer demand, and then designs, manufactures, and markets products to fill those gaps.
This acquisitive growth strategy serves to increase revenues, on the one hand, but absent organic revenue growth, the company can plateau which causes investors to get skittish. For example, between 2021 and 2022, revenues went backwards from $248 million to $221 million, explaining why investors jumped elsewhere.
So far, though, the business model has been a success with Aterian now overseeing 12 brands across various categories, providing a diversified revenue stream as well as minimizing the impact of seasonality on sales.
International Markets Expansion
While Aterian primarily operates in the U.S., it has been making strides in expanding its international footprint as a way to re-ignite growth. Target markets include Europe and Asia.
International expansion has provided a growth avenue for Aterian, but it also accompanied by new hurdles, such as regulatory compliance and logistics challenges, let alone the burdens of hiring internationally.
Management’s aim to grow abroad appears to have been welcomed by analysts, who have a $0.75 per share target on the company, representing a 134% upside opportunity to present levels.
The lack of consistent profitability and recent revenue declines cannot be ignored, however, and raises questions about its long-term potential.
One potential red flag is apparent by looking at the last twelve months revenue for the June 2023 quarter, which came in at $191 million, a sequential decline from the comparable Dec 2022 and Dec 2021 periods.
What Do The Numbers Say?
Beyond the revenue figures tailing off, net profits have stayed firmly negative, most recently to the tune of $198 million.
With that said the balance sheet looks relatively sturdy with $29 million in top line reserves and $17 million in debt. Free cash flow for the past 12 months was reported at -$4.3 million, which is not too bad at all considering the slide in the top line.
Certainly, the market has not been enamored by the mixed bag of financials and placed a disappointing price-to-sales multiple of just 0.1x on the company. We can’t overemphasize how poor a valuation that is to be worth just 10% of sales. The steep losses appear to be the culprit in the market awarding it that low multiple.
Our own analysis suggests that the company is faring better than its valuation would imply. For example, when we ran a discounted cash flow forecast analysis, fair value came in at $0.44 per share, suggesting as much 38.7% upside. Nonetheless, with earnings being negative, there is no easy way to cross-reference that figure via a P/E analysis.
If we boil the numbers down, we see a low P/S multiple relative to competitors, a high analysts’ price target that varies widely suggesting a good deal of uncertainty, and a reasonable upside to fair market value implying the stock is subject to a good deal of volatility.
What to Look For?
Aterian operates with a lean inventory model, supported by its AI algorithms, that minimizes storage costs while also exposing the company to risks related to overstocking, impacting both sales and operating expenses.
Fluctuations in inventory levels relative to sales is an important metric for investors because it directly affects profitability and customer satisfaction.
While its AI-driven approach to consumer goods and a diverse product portfolio provides it with growth levers, too many questions around profitability, financial stability, and valuation arise to make conservative investors comfortable.
Certainly, if Aterian can effectively leverage its data-driven business model to accelerate growth and improve profitability, it could offer significant upside potential as analysts forecast. But it’s a stock best-suited to investors with a high risk appetite.
So the question why is Aterian stock dropping? Declining revenues, negative net income, and high cash burn rate have investors spooked.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.