Target Plus, Amazon And UK Entry Will Shape Future Success

Key Takeaways

• Aterian plans strategic market and product expansion to boost revenue and margins through new channels, consumable products, and Amazon partnerships.
  
• Supply chain diversification and technological advancements aim to enhance cost efficiency and support long-term earnings growth, supplemented by a share buyback program.
  
• Aterian's reliance on China for manufacturing alongside tariffs and geopolitical tensions poses risks to cost structure, pricing strategy, and future revenue growth.

Catalysts

Operates as a technology-enabled consumer products company in North America and internationally.

• Aterian plans to expand its market presence by entering new sales channels and markets, such as expanding their offerings on Target Plus and entering the U.K. market through Amazon Seller Fulfilled Prime, which is anticipated to positively impact revenue growth.
  
• The company will focus on launching new products across its brands, including moving into consumable-based products like Squatty Potty flushable wipes, anticipated to drive repeat purchases and improve margins over time.
  
• Aterian is taking steps to improve its supply chain resilience and reduce costs by diversifying its sourcing away from China, aiming to lower the percentage of goods sourced from China from 75% to 50% by the end of 2026, which can enhance net margins and cost of goods sold.
  
• The company aims to leverage technological improvements and a stronger financial position to achieve operational efficiency, enabling it to expand more rapidly and cost-effectively, positively impacting earnings and cash flow in the long term.
  
• Aterian has implemented a share repurchase program, reflecting management's confidence in the company's future valuations and financial performance, expected to support earnings per share (EPS) growth by decreasing the overall share count.

Aterian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aterian's revenue will grow by 2.4% annually over the next 3 years.
• Analysts are not forecasting that Aterian will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Aterian's profit margin will increase from -12.0% to the average US Consumer Durables industry of 7.7% in 3 years.
• If Aterian's profit margin were to converge on the industry average, you could expect earnings to reach $8.2 million (and earnings per share of $1.36) by about May 2028, up from $-11.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Consumer Durables industry at 8.9x.
• Analysts expect the number of shares outstanding to decline by 3.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.1%, as per the Simply Wall St company report.

Aterian Future Earnings Per Share Growth

Risks

• Aterian's heavy reliance on China for manufacturing (75% of net revenues) presents risks related to tariffs and geopolitical tensions, which could affect cost of goods and ultimately impact net margins.
  
• The anticipated 20% tariffs on China-sourced imports may impact cost structure, potentially limiting Aterian's ability to maintain favorable pricing and affecting revenue growth.
  
• Declining net revenue in the fourth quarter of 2024, even after accounting for SKU rationalization, suggests potential challenges in maintaining consistent revenue streams.
  
• Consumer confidence might weaken due to macroeconomic factors, which can impact transaction volumes and revenue, particularly for non-essential consumer goods.
  
• The shift of expansion efforts and new product launches to the second half of 2025 poses execution risks, potentially affecting the timely realization of projected revenue and earnings growth targets.

Valuation

• The analysts have a consensus price target of $8.0 for Aterian based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $106.5 million, earnings will come to $8.2 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 9.1%.
• Given the current share price of $1.98, the analyst price target of $8.0 is 75.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.