Aterian (ATER) product categories include home and kitchen appliances, kitchenware, environmental appliances, beauty related products and consumer electronics.
Aterian sells unbranded consumer products such as ACs, dehumidifiers, refrigerators, dishwashers, etc. on marketplaces such as Amazon, Walmart, etc. Many products are (one of) the best ranked in their category, which makes it extremely difficult to compete with these products.
The company is able to launch new products and get them to the #1 position in their category relatively quickly. They also acquire existing products to grow inorganically (buy and build), more on that later.
The company has grown revenues ~88% YoY. Revenues were a mere ~$35 mln in 2017 and now increased to $48.1 mln, to $68 Mil Aug. 2023, with 2023 project revenues around $350 mln.
Company raises 2023 Net Revenue Outlook Range to $360 Million – $390 Million
Aterian is expanding by way acquisitions (Squatty Potty, a Leading Health & Wellness Brand)
Improved Gross margin and reduced operating losses as of 2023
Continues to launce new products
Total cash reserve grew to 61.9 Million from $26.9 Million ( more than 50%)
Investment thesis
High Price Target of $50 and average of $20.
Well-respected analysts put price targets on Aterian of $42 to $50 in 12-18 months. These are Brian Nagel with a $50 PT and Tom Forte with a $42 PT.
The company has significant organic sales growth, which is accelerated by the company’s buy-and-build strategy of e-commerce brands and products. Aterian was one of the first companies to apply this strategy in this niche, and now other companies such as Thrasio are doing the same. In case you don’t know, buy-and-build is typically used by private equity funds as it offers very attractive returns, because…
Buy-and-build M&A creates value in two ways: multiple arbitrage and higher margins. Aterian acquires smaller companies at low multiples (lower than Aterian’s) and there is significant cost cutting opportunity after acquisition (i.e. less personnel and back-end integration).
The company will become profitable this year, which enables the company to use its cash flows and debt for M&A instead of diluting stock offerings.
ATER’s revenue has grown faster (52.95% per year) than the US Consumer Electronics industry average (9.07%)
The share price has dropped significantly, and offering an attractive investment opportunity. It was overvalued earlier this year (at the peak of the run-up), but a $9 share value leads to a ~$300 mln market cap. With 2023 revenues expected at 2023, this implies a ~0.9 price-to-sales ratio, for a business growing ~70% per year.
Despite some short-term uncertainty, there is significant upside potential in the short to mid term (12-18 months) due to share price appreciation and potential shorts that have to cover (more on that in a bit). The company raised money from institutional investors at $15.00 in June, so this could be considered a floor. Well-respected analysts put price targets on Aterian of $42 to $50 in 12-18 months. These are Brian Nagel with a $50 PT and Tom Forte with a $42 PT.
Highlights
Marketplaces allow unbranded products to thrive. It’s all about reviews & rankings, not brand. With >2K producs, 14 brands and 35+ best sellers it’s very difficult to compete – and it’s a thriving business, as Amazon revenue from third party sellers increased 34% in Q2 2023 vs. last year.
Company growth is extraordinary with a lot of room to grow still: (i) new products, (ii) new channels (other marketplaces and DTC) and (iii) other geographies. Aterian is now also listing products on Walmart, Wayfair etc.
The company has significantly increased their margins earlier this year. In Q1 2023 they increased gross margins by 14% to 54% and contribution margin by 15% to 13% (from -3%). M&A activity allows the company to cut costs heavily after an acquisition.
The company has a healthy pipeline of M&A targets, as indicated in their Q1 2023 earnings call. They have an M&A pipeline of potential targets with TTM net revenue of $613 million and TTM EBITDA of $91 million (according Q1 earnings). This is very attractive for its buy-and-build strategy.
The company is in discussions with investment banks to attract cheaper debt to improve the cost of capital for its accelerated M&A strategy. The cheaper debt and $30 mln EBITDA (expected this year), the company should be finance its buy-and-build strategy in an attractive way.
The company’s developed AIMEE™. a tool that enables customers to scale thousands of SKUs across the world’s largest e-commerce channels. It automates marketing and pricing, increasing the unit economics. AIMEE has only been recently launched, but it could drive significant future revenues (there’s about 1-2 mln third party sellers on Amazon).
Case for Short-Squeeze and price hitting $50.
- Currently ATER is one of the hot stock that is forcing shorts to cover.
- FTDs were significant considering a small cap company (355 Mil Cap).
- Stock was shorted all the way from $50 to $3.40
- Significant number of calls are in the money.
- The $40 million was raised at $15 per share which can be considered a floor.
- Ortex issued multiple short-squeeze signals on ATER in past few weeks.
- Utilization over 94%, cost to borrow above 140. Very small number of shares to borrow (75K).
- Stock been on threshold securities list due to FTD which peaked again (Source)
- Insider ownership is 46% (Insider ownership) and they bought $11 Mil only in Q3 2023.
- Retail momentum is pushing shorts to edge.
Hedge funds have also increased their position last year (based on reported thus far – some 13Fs still to be filed:
Based on 13Fs reported so far, hedge funds have increased their position in Q1 and Q2 2023
While this could be an attractive opportunity already, company is quite heavily shorted – and some shares on loan will need to be bought back due to Failure-to-Delivers (FTD). This combined could lead to a short term upward momentum.
Let’s dive into more detail.
Short term catalyst: tightening short constraints and Failure-to-Delivers
~7.5 Mil stock shorted (Nasdaq), but – short volume since then was >50%- so probably more now. Borrowing cost is around 7.6% on Fintel data
More than 17.5 Mil shares needs to be returned
98% utilization rate, – Finteal shows only 350K shares to borrow of a 15.6 mln float
Shorting cost starting to increase (short demand is high / supply is low)
Buying pressure as shorters have to buy back their shares, as +-35 days ago failure-to-delivers started to happen. In other words, I believe these have to be bought back next week.
This article was written by u/JellyfishComplete370.
