Aterian (NASDAQ:ATER) is a consumer products company. It sells a wide variety of goods for home and personal use, such as the Squatty Potty line of toilet stools. That’s apt, as ATER stock has taken a massive dump this year. After rising to $49 this spring, shares collapsed to just $3 this fall.
Now, however, ATER stock is back on the upswing; it short squeezed in September and is well off its summer doldrum lows. So is there something to this comeback story, or should traders take advantage of the recent rally to exit?
Mohawk Rebrands And Refocuses
Until April 2021, this company was named Mohawk Group Holdings. However, it decided to change its name to Aterian. The company stated that its name was inspired by the Aterian, which was a stone age era tool industry which led to rapid innovation and human progress. Aterian believes that its investments in artificial intelligence (AI) and agile supply chains will allow it to create a transformative experience in the consumer products industry.
Also, to be clear, this is a separate Mohawk from the more well-known one that does carpeting. Rather Mohawk (now Aterian) was created in 2014 with the express aim of using AI to build a next-generation consumer products company.
Specifically, the company relies on its Artificial Intelligence Marketplace Ecommerce Engine (AIMEE) to be the special sauce to generate shareholder value. AIMEE is supposed to use live market data to identify new product opportunities, manage inventory and advertising, and maximize efficiencies in the supply chain.
A Spotty Track Record
But, does it work out as well as it sounds? At least so far, it wouldn’t appear so. The company hasn’t grown all that quickly on an organic basis, and it’s not been real close to reaching profitability in any given year, either.
Perhaps most embarrassingly, the company’s supply chain has broken down in a major way. It seems that the firm was too reliant on products coming in from China, and thus have been majorly disrupted by the pandemic and ensuing logistics shocks that resulted from that. Last quarter, the company generated just $68 million in revenue, which was shockingly short of analyst estimates at $95 million. ATER stock collapsed on that earnings report.
As a result of the company’s woeful 2021 earnings, it also ran into financial strain. As a result, it had to restructure its financial obligations. It did so with the issuance of a bunch of ATER stock, putting more downward pressure on the already sinking share price.
Underperforming Acquisitions
Aterian has run into trouble from its supply chain getting tangled up. However, that’s hardly the only issue with the company. It also seems the firm’s core business has failed to achieve the levels of optimization that you might have hoped for with AIMEE. Indeed, it seems that Aterian has had to turn to acquisitions to bring in new revenues and make up for shortfalls from the existing product lines.
Short seller Culper Research worked through the acquisition math. In Q2 of 2020, Aterian generated $59.8 million in revenues. Based on the trailing revenue run-rates of its various subsequently-acquired businesses, it should have managed $106.9 million in Q2 2021 revenues. That’s with the assumption that Aterian didn’t see any organic growth on its core or acquired businesses, just that they held pace with previous results.
Instead, Aterian did just $68.2 million of Q2 2021 revenue. That’s a massive shortfall versus what you’d expect given all the M&A activity. Aterian bought so many new businesses yet overall revenues barely budged versus 2020. That’s not good at all. It appears that a strategy of buying a bunch of random largely unconnected consumer products brands and rolling them up under one corporate parent isn’t going to pay dividends.
Short Squeeze Is Reasonably Likely
Given all these concerns, why is trading interest so high for ATER stock? The possibility of a short squeeze is the dominant bull thesis right now. Reddit and social media are alive with short squeeze chatter, and there’s a decent chance that it may come to something.
Over the past week, Interactive Brokers (NASDAQ:IBKR) has had very little ATER stock available to short, indicating a heavy short interest. Additionally, short sellers are paying an approximately 70% annual borrow rate right now to short sell Aterian. That’s enormous! Even the well-known WallStreetBets are generally in the 10-20% range or lower; 70% is an astronomical borrow fee. Short as a percent of float also clocks in at a spicy 38%.
This by no means guarantees a short squeeze. However, the odds of significantly higher here than at many if not most of the other popular stocks on Reddit.
ATER Stock Verdict
Aterian is a classic trade-off between short squeeze potential and poor fundamentals. Let’s get one thing clear: The short sellers have a good reason to be negative on Aterian. The company’s management team and business operations inspire little confidence.
However, the stock has already collapsed since this spring. And short interest is off the charts. It seems a touch too aggressive to maintain heavy short positions at this point. Strictly as a trade, there may be a case for owning ATER stock here. Just be careful and don’t overstay your welcome.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.