If E-commerce is not the biggest mega trend of the last decade, it is at least something that have changed the lives of all of us. E-commerce is all around us now, and COVID have brought it further into homes that might not have used those channels before. But not only consumers have had to adjust to changing times, also the sellers have had to embrace new ways of channeling their goods. One of the companies trying to further reap the possibilities within the sector is Aterian. I first heard about this company in a Motley Fool podcast, and when I heard about the business model, I straight away thought "Yes, why not! That business model might just be very scalable...!".
The Idea, Product and Potential
Retail commerce in 2020 was approximately a USD 24 trillion market. Thereof only 18% or 4.3 trillion was from ecommerce. Retail is forecasted to increase to almost USD 30 trillion by 2024, and as the percentage of retail channeled through ecommerce is expected to further increase to 21.5%, the ecommerce will be a USD 6.4 trillion market in 2024. That is a 50% increase in just 4 years. Even if this was to come in short, it would still be a significant enhancement of the market in the next coming years.
As mentioned in the very first paragraph of this article, not only the consumers have had to embrace e-commerce, also the sellers, which in many circumstances are one-person companies, small "mom-and-pop" stores and other small companies. Often many new challenges arise when these types of companies add the "e" to e-commerce. One of the biggest challenges is clearly creating visibility in a marketplace that can seem limitless. Therefore many companies use larger platforms to sell their products, and the best known to most of us is Amazon. This is where the opportunity for Aterian arises.
The first time I heard about Aterian the name was actually Mohawk Group ($MWK). Aterian recently re-branded themselves. There can be many reasons for that, but in the end I like the idea of the new name, that very well signals how the company see their opportunity in the e-commerce space. They describe it in the re-branding announcement as follows: "Our new name, Aterian, draws inspiration from an important stage of early human progress. Dating to the Paleolithic era, the Aterian industry marked a leap forward in the design of innovative tools that led to greater efficiencies. Similarly, the consumer products industry is entering a pivotal moment as technology becomes a critical tool for brands in their efforts to predict and respond to online consumer demand at scale."
What I am taking from this statement is, that like the Aterian tools were created to further improve other areas of work, Aterian is building a technology tool to further improve efficiency of brands in todays online marketplace. So what is this tool that they have developed? They describe it as an end-to-end cloud-based platform, Artificial Intelligence Marketplace Ecommerce Engine (AIMEE™), that leverages machine learning, natural language processing and data analytics to streamline the management of products at scale across leading online marketplaces, including Amazon, Shopify and Walmart. The technology platform:
Utilizes live market data on product trends to research new product opportunities;
Aggregates key data insights, including new product planning, financial forecasting, inventory levels and media buying spend, to enable execution across multiple channels;
Implements automated marketing strategies to scale sales; and
Manages fulfillment and supply chain logistics to enable faster delivery of products to customers.
Looking at the above functionalities of the AIMEE platform, it solves some of the difficult-to-solve hurdles for smaller companies, like data analytics, marketing and logistics. But it also identifies trends that current product mix in the market is not capturing, hence identifies the product development opportunities that might be there in the market, not fully served.
Aterian currently has thousands of SKUs (product lines) across 12 owned and operated brands and sells products in multiple categories, including home and kitchen appliances, health and wellness, beauty and consumer electronics. Some of them self-developed, others acquired, which directly links to their official mission statement:
"We build, acquire, and partner with brands, harnessing proprietary software and an agile supply chain to create top-selling consumer products"
The mission statement of Aterian is probably not inspirational in comparison to those we see on green energy and healthcare, but it is straight to the point in a commercial setting, and if they can really:
Identify underserved product ranges, and self-develop those products or acquire them from smaller companies;
Significantly increase the sales and operational leverage of well performing products , when acquiring them from smaller companies,
I really believe that they can be hugely successful.
What is so interesting about 1. is that often, on online marketplaces, including Amazon, Shopify and Walmart, consumers do not search for specific brands, but searches for type and functionality. If those searches do not provide adequate response to what the consumer expected, it obviously indicates an underserved product range, ready to be harvested. A golden opportunity for Aterian.
What is so interesting about 2. is that general operational leverage can be very powerful. Spending less on logistics, migrating to already established operational platform, directing marketing spend more efficient etc. can quickly multiply the value of a product. A golden opportunity for Aterian.
Looking into the latest filings it is obvious that Aterian have become more acquisitive over the last 2-3 quarters. Buying companies at 2-3 times EBITDA in the expectation to secure both revenue acceleration and operation leverage, and therefore harness more value from the investment.
Concluding somewhat on this section, it is obvious that the business model could be a huge winner in the fragmented sellers market, but it is difficult to fully evaluate the power of the AIMEE platform, and only time and results will show, how well the platform will perform.
Financials
Generally the balance sheet of Aterian looks somewhat fragile. Recent acquisitions have been financed by increased debt and further stock issuance. Current cash balance at Q1.2021 is USD 35 million, while debt have increased from USD 20 million to USD 130 million over two quarters, while over the same period the stock issuance have increased the shares outstanding with 53%, heavily diluting ownership. All those money have been spent on acquisitions, which is of course a part of the M&A strategy, which as mentioned previously is a golden opportunity if you can harvest further from those investments, but at the same time the revenue growth has not quite been impacted the way I would have expected it, if you look at the latest two quarters.
What can though be mentioned as a positive from the financials is that the operational cash flow, seems to have been on a positive trend and in Q3.2020 and Q4.2020 the cash flow from operations was positive. In Q1.2021 though that operational cash flow was back in red.
Gross margins seems as well to have been on the right path, and seems to have stabilized in the mid 20's the last 12 months. But as operating expenses have accelerated faster than the revenue, and with significant expenses from fair-value adjustments on contingent earn-out liabilities, the operational leverage have not yet shown improvements.
In the coming periods I believe that further investments and acquisitions, will continue to be financed by debt and stock issuance, further increasing the fragility of the balance sheet until significant improvements on operational figures can be made.
Management and Culture
Co-founder Yaniv Sarig is still heading up the company as CEO. He owns 1.7% of the company, while the total ownership from the company's directors is 7.4% as the time of the article, which feels quite comforting, though it does look strange that owner directors have more than the Founder and CEO himself.
Taking a look at the Glassdoor ratings, they do not seem utterly impressive with a 3.7 overall score, and 44% recommending the company to a friend, and 0% approving of the CEO. All this is though only based on 11 reviews.
Stock
Aterian is currently running at a market cap of 620 million USD. IPO'ed back in 2019 at a USD 8.5 price tag and is currently at USD 19.77 after rising 13% in todays market. It shortly hit USD 43 in mid February before the general high-growth market declined significantly from the highs.
Currently the stock trades at a P/S of 3, which of course doesn't look bad compared to the hefty valuations we see on other growth stocks out there. But, my concern with Aterian as it stands today is, that I am still not fully convinced whether they will succeed on path to profitability. There are many ways this story can play out, and we will have to see how they execute.
Risks
Generally they rely heavily on Amazon's marketplace, which could be a risk, though this does not seem to be a major concern to me, as long as Amazon is seeing the sales channeled through their platform.
Aterian of course have some competitors out there that mimic the business model of Aterian. They mention some of them specifically in their investor presentation. But currently I see plenty of opportunity out there for all the players in this space. I guess this is also apparent, when looking at the capital investors, the likes of BlackRock, J.P. Morgan, Goldman Sachs etc., that are currently pushing money into this.
Usually I do not spend much time on short reports, but in May came out a report from Culper. Beyond a lot of claims on the link to convicted felons and criminals, which is very difficult to evaluate, I do see mentions of some of the same concerns raised by me in this article. Is the AIMEE platform powerful enough to make a significant difference? Have any of the products shown that consistent enhanced performance? Why have CEO Yaniv Sarig sold 2/3 of his shares since IPO? and many others. These are valid questions, and I believe it is up to Aterian and the management of the business to show consistency in the storyline, if they are to shoot down the claims of the Culper short.
MoGeBat Score: 57
Concluding on the research made, Aterian looks to have a very interesting business model and a very interesting opportunity in their consolidation of products and brands in the e-commerce marketspace.
I haven't made up my mind on this company, and I feel I need to see more quarters with consistent display of trending operational leverage. I really need to see the investments made in the last quarters hit the EBITDA before I am convinced to invest.
I will be following the revenue growth and the operational leverage closely in the coming period.
Usually a MoGeBat Score of above 75 is highly investable, 65-74 investable, 55-64 only investable in very special circumstances. Therefore the 57 score of Aterian doesn't come out as lucrative, and I would nee to see more consistent path to profitability for this company before I invest, though it is interesting enough to move to the watchlist.
As usual comments are more than welcome...
Disclosure: Morten Gerdes Bach might own shares of the companies mentioned. The information expressed herein are opinions and not financial advice.
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