Exela Technologies (NASDAQ:XELA) stock has become a hot name in recent weeks. XELA stock was trading just above $1 per share in June, but it blasted off recently and settled around the $4 mark before falling and trading at $3.04 on Monday morning. Its trading volume has been impressive On Wednesday, for example, nearly 300 million shares changed hands in a single session.
In March, XELA stock jumped from $1.50 to $4.50 virtually overnight, but it soon gave back all of its gains. So what’s going on with Exela, and how do its fundamentals look?
In Need Of A Turnaround
Exela has been struggling for awhile now, as it has been growing slowly. In mid-2019, its revenue began dropping, and its sales plunged after the Covid-19 pandemic arrived. Since last summer, Exela’s revenues have been falling by around 20% year-over-year.
Exela’s management has been trying to evolve its business. The company is exiting its older, less profitable businesses and expanding its digital offerings. Exela now offers solutions such as a digital printshop, a digital mailroom, and document signing.
Those solutions could easily become more widely used in the post-Covid world. That said, 2020 was a great time for companies in those fields, and Exela was largely unable to take advantage of the opportunity.
Exela, however, hasn’t given up. For example, it received a new $90 million contract for digital services from a major U.S. healthcare insurance company.
Exela Has a Large Amount of Debt
Exela is different from most small technology companies. Typically, tech companies become publicly listed using an initial public offering (IPO) or a special purpose acquisition company (SPAC) and have clean balance sheets. In other words, many tech start-ups have a net cash position or only a small amount of debt.
Exela, by contrast, had a crushing $2 billion of obligations, including $1.5 billion of long-term debt, as of its most recent financial report. That puts Exela in a difficult spot, as the company’s market capitalization is only a few hundred million dollars. When a company’s debt is higher than its market capitalization, it’s a bad sign.
As a result, Exela’s situation is more complicated than that of the average tech company. Exela’s price/sales ratio may look cheap, as it generates more than $1 billion of revenue annually. On the other hand, to lower its risk, Exela has to address its massive debt.
Shoring Up the Balance Sheet
In May, Exela announced a $100 million at-the-market, or “ATM,” stock offering. That was completed last month. Shortly afterwards, it announced another $150 million ATM offering.
As of Friday’s market close, Exela’s market capitalization was listed at $193.5 million, though its share count and market capitalization are increasing as it issues more shares.
When a company with a roughly $200 million market capitalization issues $150 million of stock, its shareholders will be massively diluted.
At a $4 share price, for example, Exela would have to sell nearly 40 million new shares of stock to the public to raise $150 million. Those new shares will help the company pay down its debt, but they will limit the extent to which XELA stock can climb in the near-term.
The Verdict on XELA Stock
Exela is not a typical technology company. It didn’t enjoy much of a lift from the push to move services online during the Covid-19 pandemic. Indeed, management is trying to turn around the company and enable its results to recover to their pre-pandemic levels . Given how well tech companies in general have done lately, Exela is not very well-positioned.
That said, the good news is that the company is raising cash to try to make a comeback. But Exela still has a huge debt problem, making XELA stock risky. However, Exela has been able to issue stock and bring in much-needed capital. That, plus the company’s renewed focus on its digital offerings, could enable its turnaround to work.
Unlike many penny stocks, Exela does have a large revenue base from its existing businesses. If management can pull off a turnaround, the company’s shareholders could enjoy a sizable gain.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.