XELA Stock Is Likely to Tumble on Debt Issues, Meme Stock Weakness

Exela (NASDAQ:XELA) has some interesting products and initiatives. But, given the company’s high debt, lack of growth, and low margins (for a software maker), investors should sell XELA stock.

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Also likely to depress this meme stock in the short term and the medium term is the ongoing weakening of meme names.

High Debt

As of the end of the first quarter, Exela’s total debt was a very high $1.63 billion.

That’s a very high number because its total revenue last year was $1.3 billion, while its 2020 operating income came in at -$12.7 million.

Making matters much worse, nearly all of its debt ($1.5 billion of it, to be exact), is maturing within two years from now. So Exela is going to have to find a way to pay back a great deal of money relatively soon.

In recent months and years, the company has come up with the funds to pay its debt primarily by issuing additional shares of stock and selling a number of its businesses.

Earlier this year, the company sold $100 million of shares, and it intends to market another $150 million of them later this year.

Meanwhile, Seeking Alpha author Bashar Issa recently reported that Exela had sold its Logistics, Physical Record Storage, and SourceHOV Tax businesses in 2020 for about $50 million.

A Vicious Cycle

Issa says that, to pay its debt, Exela will have to issue even more shares and unload more businesses. I agree with that prognosis. Unfortunately, selling more stock will lower the value of each share, and unloading more businesses will further reduce the company’s revenue and profitability.

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So Exela looks poised to enter a vicious cycle; its declining revenue and stock sales will, sooner or later, cause the value of its shares to drop further. As the value of its stock falls, it will have to sell even more shares and unload more of its businesses to pay off its debt. The latter action will lead to further revenue declines and fully restart the cycle.

Even before having to sell off more of its businesses, Exela has not been growing. The company’s revenue in 2018, 2019, and 2020 came in at $1.59 billion, $1.56 billion, $1.29 billion, respectively. In the same years, the company’s operating income came in at 437.4 million, $28.3 million and -$12.7 million. Its operating cash flow over the 12 months that ended in March was -$58.3 million.

Finally, even though it’s often referred to as a software company, Exela actually specializes in “labor intensive” outsourcing work that carries low margins, Issa noted; as a result, its 2020 gross margin was just 20.8%.

Some Promising Signs

Exela’s former CEO, Ron Cogburn, said late last year that its Digital Asset Group (DAG) “was purpose-built to foster innovation and to drive growth in {its} digital assets.” Indicating that DAG carries very high margins, he added that “another critical aspect of our digital assets is our ability to sell these solutions to multiple clients with very little customization or the need for professional services.”

Two of the company’s offerings that appear to be part of DAG – Digital Mailroom and Drysign – grew meaningfully in Q2, “with DMR delivering a growth rate of 99% in its SMB customer base and Drysign delivering a growth rate of 144% in its user base” versus Q1, Exela stated.

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But unfortunately for Exela and the owners of XELA stock, DAG only constituted 8% of the company’s revenue in Q1, indicating that DAG’s growth will be a classic case of “too little, too late” for the company.

Similarly, Exela signed a 10-year $90 million deal to provide its PCH Global digital exchange platform for “a major U.S. insurer.” The product will process health insurance claims for the insurer.

While that sounds like a very promising business, $9 million per year will not move the needle for XELA stock, and the company probably will not be able to ramp up the business quickly enough to enable it to handle its debt without tremendously lowering the value of its shares.

Tough Times for Meme Stocks

Reddit users have shown a great deal of interest in Exela, and the stock rallied very sharply in March and July on no major news other than Reddit mentions, indicating that XELA stock is a meme name. But as I’ve pointed out in past columns, it’s not a good time to invest in meme stock with poor fundamentals, as the federal government’s stimulus checks fade further into the past, young people start spending more money on social activities, and the end of the unemployment insurance bonus rapidly approaches.

Indeed, since reaching its July peak of nearly $4.35, XELA stock has tumbled almost 25%.

The Bottom Line on XELA Stock

Exela’s high debt, lack of growth, and losses, combined with the weakness of meme stocks, indicate that the shares are likely to enter a vicious cycle from which they will probably not emerge for years, if ever.

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It’s possible that Exela could be acquired by a company that’s interested in its DAG business. For that reason, shorting the shares is somewhat risky. But in all likelihood, potential acquirers will wait for XELA stock to fall much further before making such a move.

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On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

 

 

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