What happened

Shares of Aterian (NASDAQ:ATER) crashed on Tuesday. The e-commerce company saw its valuation surge after emerging as a potential short-squeeze candidate, but big gains over the last couple of weeks also opened the door for a dramatic pullback. The stock ended today's trading down roughly 39%. 

There doesn't appear to be any major business-specific news behind the sell-off today, but it's not surprising to see the company's share price post volatile swings on the heels of gaining some traction as a meme stock and short-squeeze candidate. Investors from Reddit's WallStreetBets and other investing-focused social media communities bought shares in the e-commerce company in order to trigger a squeeze, but it looks like the push is now collapsing after an impressive surge.

A chart line going down.

Image source: Getty Images.

So what

Aterian had attracted heightened short interest due to an uninspiring business performance and a highly bearish report from Culper Research earlier this year alleging that the online retail company had some unscrupulous business connections.Short squeezes have helped power incredible share-price gains for companies, including GameStop, AMC Entertainment, and Support.com this year, and Aterian had been gaining favor as a new short-squeeze candidate over the last month. 

However, Aterian's short-squeeze rally may prove to be short-lived compared to meme stock favorites like GameStop and AMC. Even so, the company's stock is still up roughly 171% over the last month and 42.5% over the last year.

Now what

Aterian has managed to drum up some bullish sentiment as it touted the advantages of its AI-powered e-commerce services. However, the company's core business still revolves around reselling low-cost goods, and the outlook for consistent profitability and long-term earnings growth remains questionable. 

Aterian has been pursuing acquisitions in order to reinvigorate growth, and it's turned to new stock offerings in order to fund purchases and internal operations. The company has increased its shares outstanding roughly 42.5% year to date and 123% over the last three years. It's possible that the stock could return to rallying if renewed meme and short-squeeze momentum kick in, but the business trajectory looks uncertain, and continued stock dilution presents another risk for shareholders. 

Aterian now has a market capitalization of roughly $423 million and is valued at approximately 1.75 times this year's expected sales.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.