Recent Surge by Exela Technologies Is Not Justified

Exela Technologies (NASDAQ:XELA) is up about 172% in 2021 and has a 1-year performance of 118.57%. XELA stock recently posted a 5-day performance of about 31.04%. Nevertheless, my financial analysis leaves me without any interest.

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Exela Technologies is a tech company, specifically a global business process automation company with more than 4,000 customers across 50 countries.

It’s true that I love technology and have a strong passion for stocks. But I am picky.

I am interested only in good stocks with great fundamentals. And most of all, companies with a great valuation. XELA stock is by far not on this list.

Which leads to the question: Why did XELA stock move in 2021?

XELA Stock Short-Squeeze

One more time Reddit traders and other social media forums have managed to short-squeeze the global business process automation company.

Renewed interest in XELA stock sent the stock from a price of $1.45 in early January 2021 to a 52-week high of $7.82 in March.

And then, as I have written many times, the excitement disappeared and the stock fell to a recent price of $3.23. This was more than a 60% selloff. But recently, a brief rally of about 30% occurred, before the stock went back to trading around $3.17.

Investors may wonder if this penny stock a bargain now.

Supply and demand for no obvious reasons will move stock prices. It happened with XELA stock very recently. But notice the 1.88 beta of the stock on Yahoo Finance. This is a very volatile stock. It is not suitable for the investors who are nervous with huge price swings in very short periods.

News From the Company

Exela recently announced an expansion of its automation services to include intelligent document processing, which increased the interest in XELA stock.

Suresh Yannamani, Exela’s president, said in a statement:

“Exela continues to iterate and advance solutions to meet our customers’ changing needs. The latest IDP and EON combination embraces the evolving work from anywhere environment that customers and their employees are embracing.”

Meanwhile, the company said its DMR and DrySign programs posted strong growth during the second quarter.

“International expansion continues with DMR launch in France and Germany planned for Q3FY21.” a press release says.

This business news is important as it signals the company is focused on growth and business expansion. But to me, what matters most is finance-related news and the financial performance of the stock.

Financials: No Excitement Present

Finally, another press release from the company included the following financial highlights:

  • $85 million raised under the $150 million at-the-market equity program launched on June 30, 2021
  • Proceeds will primarily be used to reduce debt and lower interest expense by approximately $25 million, plus and fund growth
  • $205 million of cash and cash equivalents on hand as of June 30, not including additional borrowing availability

What this means for investors is stock dilution, which is negative for the valuation of the stock. Yes, raising cash may be cheap for a public company. But it comes at a very high cost, destroying or deteriorating a lot the intrinsic value of the stock.

I could not ignore the company’s first quarter 2021 results.

Exela reported revenue of $300 million. This was an 18% decline year-over-year the company attributed to the pandemic, “transition revenue and asset sales.”

Net income loss reported was $39.2 million, compared to a loss of $12.7 million for Q1 2020.

And when I checked the operating income for the first quarter, I saw the company reported a positive figure of $4.3 million compared to a loss of $2.2 million in the same period in 2020.

But the longer trend matters. Analyzing the 5-year trend on MarketWatch for XELA stock shows a 2-year consecutive revenue decline, net losses for all the fiscal years for 2016-2020, as well as EBIT or operating income that is also negative for all five years.

And my favorite financial metric, free cash flow, was negative for the past three consecutive fiscal years.

Bottom Line on XELA Stock

Exela Technologies is burning cash and diluted its stock to generate cash to expand.

I will pass on XELA stock. With no profits, recent stock dilution and negative free cash flow, this tech stock is not on my list to monitor. It’s not a hot ticket, and certainly not a hot company, based on its financial performance.

On the date of publication, Stavros Georgiadis, CFA  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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn

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