In early 2021, e-commerce company Aterian (NASDAQ:ATER) was flying high. Aterian had leveraged its artificial intelligence and data gathering algorithms to quickly and effectively produce and bring to market products to sell on websites like Amazon. Shares reached a high of $47.66 on Feb. 17 and at that point the stock was up 177% on the year, compared to the S&P 500's 4% gain. It's been an entirely different story since then. At the time of this writing, Aterian is trading for $4.08 and is trailing the S&P 500 by about 95 percentage points year to date.

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What's behind the trouble

The big trouble began with Aterian's Q2 results, which were reported on Aug. 9. Year-over-year revenue growth slowed to 14%, following the previous four quarters where growth was between 44% and 96%. Additionally, contribution margin, net income, and free cash flow were all down from the year-ago quarter, and the company withdrew its guidance. These results were an abrupt change in direction for the company and the market responded harshly, with shares dropping 50%.

The third quarter wasn't much better. Revenue was flat sequentially and up 16% year over year, but the bottom line loss was even more severe than in Q2 with the net loss coming in at $111 million. For comparison, in Q3 of 2020 the company had a net loss of only $800,000. While the immediate market reaction was not as severe as that to Q2, the general downward trend continued. Investors were left wondering about the future of Aterian.

Blaming the supply chain 

In both the Q2 and Q3 earnings calls, management attributed the company's poor performance to supply chain issues. In fact, the phrase "supply chain" was mentioned 19 times and 32 times on the Q2 and Q3 earnings calls, respectively. For a company so reliant on rapidly producing and bringing to market new products, these disruptions have severely impacted the business. For example, in Q3 of 2020, Aterian launched eight new products, in the most recent quarter they brought to market no new products. Additionally, the company needed to raise prices in order to combat the impact of the supply chain disruptions, and management admitted this had an impact on sales. This demonstrates Aterian does not have the pricing power necessary to weather supply chain issues or inflation without it having an impact on their revenue. 

The path forward

When Aterian is at its best, it uses its proprietary AI to determine what products are in demand, produces them quickly, and sells them on third party websites. Aterian claims this go-to-market timeframe is six to eight months, compared to the 18-24 months it takes its competition to complete this cycle. The concern for investors is the lack of any plan to address the supply chain issues that are preventing this go-to-market cycle from taking place. 

To that point, CEO Yaniv Sarig stated, "We'll speak in more detail about our strategy for 2022, and we'll have some exciting new initiatives to share with our shareholders in the next few months.". Management's comments in the Q3 earnings call revolved around how the business will be better on the other side of the current struggle but offers no concrete plans for how to get there. That's not going to convince investors to hang on to their shares.

There is still lots to prove

One could argue that with Aterian near its 52-week low, now would be a good time to buy shares in the hopes the company can turn things around. But that idea is what buying Aterian would hinge on: hope. Until it can put together a few consecutive quarters of improving sales and decreasing net losses, Aterian seems like more of a value trap than a value play.

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.