Aterian (ATER), formerly Mohawk Group Holdings, is a consumer products platform driven by technology that builds, acquires, and partners with e-commerce brands.
The company uses Artificial Intelligence (AI) and machine learning algorithms to create top-selling consumer products. Currently, Aterian primarily operates through online retail channels like Amazon (AMZN), and Walmart (WMT).
Aterian owns and operates 14 brands across multiple categories, including kitchenware, heating, cooling, and air quality appliances like dehumidifiers, humidifiers, and air conditioners, health and beauty products, and essential oils.
The company also has a perks program, where shareholders who meet certain criteria can get discounts on best-selling products from Aterian brand websites, or Amazon. I am neutral about this stock. (See Ater stock charts on TipRanks)
Q2 Results
In fiscal Q2, the company’s net revenues rose 14% year-over-year to $68.2 million, missing analyst estimates of $94.4 million. The company’s net losses widened to $36.3 million in Q2, from $2.9 million in the same quarter a year back.
ATER’s adjusted EBITDA loss of $3.7 million in Q2 again disappointed the Street, as analysts were expecting an adjusted EBITDA profit of $4.1 million, according to BTIG analyst Marvin Fong.
A crisis in the global supply chain, inflation, and the reopening of brick-and-mortar stores made it a challenging quarter for the company.
Aterian has even withdrawn its outlook for Fiscal Year 2021, due to unpredictability within the global supply chain, and the ongoing COVID-19 pandemic.
Rising Costs of Shipping Containers
According to Fong, shipping container prices have soared more than 200% in the past three months, making a huge dent in Aterian’s bottom line.
The company expects these costs to have a negative impact over the next six to nine months.
However, according to Fong, Aterian is trying to address this situation by “negotiating with three of its largest shipping partners, including Amazon Global Logistics [AGL], to secure more sustainable rates.”
The analyst believes that “ATER’s status with AGL should prove an advantage over the long-run as few marketplace sellers have access to AGL’s buying power. ATER is also speaking with additional shipping providers to see if it can reach even more attractive terms.”
ATER Forced to Seek Loan Covenant Waiver
The company could not meet its adjusted loan covenant from its lender, High Trail, of having an adjusted EBITDA of at least $12 million for the 12-month period ending on June 30. As a result, High Trail agreed to waive off the covenant for $10.1 million in cash and $11.7 million in ATER stock.
In addition to this, Aterian “also agreed to reprice High Trails’ approximately 3.5 million warrants expiring in 2026 with exercise prices ranging from $25.10 to $33.56.”
The company also agreed to a liquidity covenant, where it will have to maintain cash reserves of over $30 million, with inventory and receivables in excess of $65 million, through October 31, 2021.
Wall Street’s Take
Fong slashed his price target from $36 to $10 in August, but reiterated a Buy on the stock. The analyst believes that visibility into the company’s future remains low, and he expects that there will be “further share dilution.”
The analyst believes that the company’s pace of recovery “will be highly dependent on container rates. Even then, it will take time for high-cost inventory to move through ATER’s P&L and for the company to resume its new product cadence.”
He expects container rates to play a large role in the pace of Aterian’s recovery, but that ATER is nevertheless undervalued, given its “portfolio of proven products.”
Turning to the rest of the Street, analysts are bullish about ATER, with a Strong Buy consensus rating, based on 4 Buys and one Hold.
The average Aterian price target of $16.30 implies 143.3% upside potential from current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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