Exela Stock Is an Incredibly Risky Play With Limited Upside

Exela Technologies (NASDAQ:XELA) reported lackluster third-quarter results earlier this month. The business process automation firm saw a steep decline in revenue growth and missed analyst expectations on both lines by a fair margin. To make matters worse, is it has a burgeoning debt load. All together, this makes XELA stock a remarkably risky investment.

Businessman or engineer working on business process automation or algorithm with flowchart on computer screen

Source: NicoElNino / Shutterstock

Despite the sluggish performance, XELA stock has done relatively well on the stock market. Its year-to-date gains are over still up about 20% which is somewhat surprising given the terribly forgettable performance of its underlying business. A big reason for its gains was its partnership with nonprofit managed care organization CareSource.

Apart from that, there haven’t been many positives that could’ve lifted the stock.

Earnings results for Exela in the past couple of years have been lamentable. It’s been eight straight quarters where its top-line growth has stalled on a year-over-year basis. It has failed to capitalize on the pandemic-induced tailwinds towards digital transformation and now finds itself in a major spot of bother.

Poor Operating Performance

As mentioned earlier, Exela’s financial performance has been in the red for several quarters. In its third quarter this year, sales declined 8.5% from the prior-year period to $279.2 million. Moreover, they also missed consensus estimates by a massive $36.5 million. The decline was driven by a combination of delayed return to office plans and seasonality.

Overall, revenues across all the company’s segments have dipped in the quarter.

The company has done relatively well in controlling its costs through effective capacity management on the earnings side. Consequently, its gross margins were at a healthy 24.2% after the third quarter. Though it may seem impressive, its figures pale in comparison on a sequential basis. Exela’s second-quarter gross margins were significantly higher at 28.6%. However, management believes that these numbers aren’t comparable to seasonality and “underutilization of resources as a result of COVID-19”.

If we dig a little deeper, the company’s operating margins have dropped significantly to under 1%. It is a substantial increase in sales and administrative expenses and a one-time expense of $3.8 million from its Legal Loss and Prevention solutions (LLPS) segment.

Furthermore, the management has high hopes of improving cash flows in 2022. This is imperative considering the company’s gigantic debt load of $1.63 billion.

Increasing Competition

According to a study from ResearchAndMarkets.com, the global business process automation (BPA) sector is likely to grow at 13.2% to $19.4 billion by 2026. However, Exela estimates that its total addressable market is over $200 billion. The massive discrepancy in market size is that Exela’s estimates also include adjacent segments such as business process outsourcing and management.

Overall, the market evolved greatly in the past few years, and several players have entered the fray.

For instance, WNS Holdings (NYSE:WNS) and ExlService Holdings (NASDAQ:EXLS) have solidified their positions in the finance and accounting BPA niche. These companies boast better top and bottom lines than Exela and have bounced back more effectively from the Covid-19 led slowdown. Moreover, their gross margins are also impressive, which points to greater efficiency in providing solutions to customers.

Furthermore, the BPA sector doesn’t have many entry barriers, so some big names in IT consulting, such as Accenture (NYSE:ACN), are planning to make a splash in the business.

Bottom Line On XELA Stock

Exela’s woes have continued in the third quarter, and it’s likely to close out the year with another disappointing performance.

It has failed to capitalize on the industry tailwinds and is up against some stiff competition which will continue giving it a tough time.

Hence, XELA stock is a highly risky investment which is best to avoid at this stage.

On the date of publication, Muslim Farooque 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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