Exela Technologies (NASDAQ:XELA) announced on July 16 that options trading was available for XELA stock. My InvestorPlace colleague, Ian Bezek, called the addition of options trading an excellent way to curb the stock’s volatility.
If that’s why you’ve bought XELA, give your head a shake … and then sell the bloody stock. It’s no reason to own any business.
History’s Full of Great Theories
Between 2000 and 2002, I worked for an online mutual fund startup selling customized portfolios for 0.85% annually. It was way ahead of its time. I can remember the CEO discussing the concept of shorting stocks, suggesting that the act was an important part of maintaining liquidity in the markets.
It’s true. Here’s proof.
“Any new buying or selling that comes into a market adds liquidity. Short selling does that by adding more volume above the normal levels. Like any increase in volume, short selling activity adds liquidity. That volume would not be there without the short sellers,” states WhiteTopInvestor.com.
While there’s no denying this is an accurate statement, it doesn’t make a stock like Exela a better bet because of this reality. It is what it is. No more. No less.
All companies and stocks are ultimately judged by their worthiness. So, the fact that XELA has more liquidity is only good news to those who want to exit or enter a position. Everyone else couldn’t care less.
At the end of the day, the only reason to buy XELA stock is that it’s an excellent business.
Is it? Maybe.
The True Value of XELA Stock
My colleague finished his July article by stating that it has a legitimate business process automation (BPA) company that could be profitable if it strengthened its margins. But, at the same time, he felt like the debt overhang was too much to get it to the next level.
Exela currently has an Altman Z-Score of -0.84. Anything below 1.81 suggests the company could go bankrupt within the next two years. To put things in perspective, AMC Entertainment (NYSE:AMC), a company I believe is a debt implosion waiting to happen, has an Altman Z-Score identical to Exela.
They’re both terrible stocks to own for the long haul.
“Our platform is designed to transform the way humans work. We provide our customers with a robust set of capabilities to discover automation opportunities and build, manage, run, engage, measure, and govern automations across departments within an organization,” states page 105 of its IPO prospectus.
“Our platform leverages the power of artificial intelligence, or AI, based computer vision to enable our software robots to perform a vast array of actions as a human would when executing business processes.”
Exela’s business description sounds somewhat similar.
“We are a leading, global provider in the Business Process Management (“BPM”) industry. Our digital foundation has been shaped to deliver fully outsourced solutions for current and evolving customer needs. Specifically, our fully operational seven-layer technology stack enables easier integration to build digital bridges over broken processes,” states page 6 of its 2020 10-K.
The Bottom Line
Like my colleague said, Exela has a real business. In Q1 2021, it had $300.1 million in revenue, 18% less than in Q1 2020. Yet, operationally, it had a profit of $4.3 million in the first quarter, significantly higher than its operating loss of $2.2 million a year ago.
However, because of its major debt load – $1.63 billion in total debt at the end of March – it lost $39.2 million in the quarter, up from a loss of $10.2 million a year earlier thanks to $43.1 million in interest costs.
Now compare it to UiPath.
In the first quarter ended on April 30, PATH had revenue of $186.2 million, 65% higher than a year earlier. In addition, it had gross margins of 73.7%, more than 3x Exela’s. However, its operating loss increased by 426% to $236 million because it’s scaling its business.
While Exela’s total debt is almost 9x its market capitalization, UiPath has $1.86 billion in net cash. Exclude its stock-based compensation of $250.8 million in the quarter, and it had a positive cash flow of $233.3 million.
I’ll take UiPath’s automation processes and stock over Exela’s every day of the week.
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On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.