What Investors Need to Know About Aterian's Q3 Earnings

Aterian (ATER -0.44%) may not be a household name in the e-commerce sector, but with a business model that's very different from the typical company in the space, it could be worth getting to know. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Toby Bordelon and Brian Withers discuss what potential investors need to know about the company and some key takeaways from its third-quarter earnings report. 

Toby Bordelon: Aterian. I think I'm saying that right. Aterian. Let's go with Aterian. Pretty good quarter. But what do they do? If you don't recognize the name, you find out what they do. They acquire, they partner with, they create their own consumer brands and products, and they sell them through various online channels -- mostly Amazon, actually. Most of their sales, they say, are through Amazon. Maybe that's a risk factor. It's a pretty obvious risk factor to me when you're relying so much on one third-party platform.

They say they use data and machine-learning processes to figure out which products to sell and how to sell them. You could think of this as the modern-day version of QVC. Is that what we're talking about here? Not quite, because they don't actually own the platform. They sell through Amazon and a few other places. But the idea is just to take a bunch of random products and consumer brands, and try to figure out how best to market and sell those -- and also try to figure out what stuff do people want to buy. That's key too.

It's not just pushing random stuff at people, it's trying to figure out what product is going to hit and be popular. There's some value in that business, I think. The quarter was pretty good -- revenue up 16% to $68 million. So, a small company. We're only at not even $100 million in revenue here.

They beat on earnings per share, [but] we've got to explain that. That was actually a massive loss. The net loss, if you go on the total based on earnings per share, was almost $111 million versus a net loss of only about $800,000 year over year.

But look: Most of this, Brian, was a $107 million loss they took from extinguishment of debt. It's basically a one-time charge we've got going on here that's not part of the ongoing business. That's why I say it's a beat, because you take that out, it did better than what people were expecting.

Some good stuff. Gross margin is 50%. That's a full 2.4 percentage point increase year over year. Not bad. That's the gross margins. You look at the net income -- operating expenses up 49%, that's not awesome. The contribution margin declined 12%. What is contribution margin? It's an accounting thing. Contribution margin is basically what's left over from your sales after you take out the variable costs. So it's what's left to contribute toward those fixed costs. That went down 12%, and it's driven by the increase in the variable costs we got going on here.

Operating loss of $7.5 million versus an operating profit of about $100,000 last year. They're blaming supply chain issues. They say that's driving these operating cost increases -- higher costs and hang-ups in the supply chain that are dealing with that. The other thing that I don't love -- they did not launch new products this quarter. Last year in the third quarter, they launched eight new products. This quarter, they have no new product launches. For a company like this, you want to see that development chain really start pumping out new products. We don't have that yet, and they're still burning cash.

You look at that stock chart, wow. [laughs]

Brian Withers: Yeah.

Bordelon: Now this stock was memed earlier this year. So again, I'm not going to blame them for this, because you cannot control what random people decide to do if they're going to bid your stock up to ridiculous levels, which is what happened with this company.

But that said, they're still down 20% for the year, which is not awesome. I don't know what the long-term advantage for this company is, and if it really needs to exist as a company, quite frankly. It's an interesting idea.

Withers: When this first come out as a recommendation, I was intrigued. You talk about finding a niche product in the space. They had all of this background and research, and then they go and develop something, and make 30,000 of them, and if that worked, they make 30,000 more or whatever.

But with the supply chain issues, and then you mentioned that they didn't come out with any new products this quarter -- that just seems like their bread and butter. They ought to be boom boom boom.

Bordelon: Well, it is. You've got to be banging on new products for people to buy. Otherwise, where's your business? That is the business. So we want to see that get back on track. It's maybe an intriguing little company to keep your eye on.

I, too, was intrigued when they first went public. But you look at it a little bit longer and think about it more, and it doesn't excite me that much right now. But I'm going to keep an eye on it. We'll see how they go.