- Exela was a meme-stock last year
- The overall business is shrinking
- Good deals don’t sell buzzwords, they deliver growth
Exela Technologies (NASDAQ:XELA) stock was a meme-stock in 2021. Everyone wanted to get in on “digital transformation.”
Now, we’re more worried about energy, inflation, and Vladimir Putin’s actions in Eastern Europe. Along the way to these more pressing issues, XELA stock was left by the roadside. It opened for trade Mar. 22 at under 51 cents per share, within pennies of where it was two years ago.
At this time last year, however, Exela stock sold for nearly $4 per share. It was trading at $3 per share as recently as July. Now, the whole company is worth just $181 million. If some meme trader talked you into buying it last year, you were the greater fool.
| XELA | Exela Technologies | $.50 |
The Exela Story
Exela Technologies is now pushing digital signatures, e-mail, and human resources management. It was created by a three-way merger in 2017. The financial engineers were Apollo Capital Management. Their main asset was a transaction processor called SourceHOV.
Ever since its creation, Exela has been fighting an uphill battle against the costs of its own construction. It made some progress last year. Over the last two years, the stock dropped by nearly 90% from $10.55 per share in 2019. But the losses continued.
In 2021, Exela did $1.16 billion in business. It even recorded a small operating profit. But overall, it lost $143 million, $1.22 per share. The big problem was the former SourceHOV, now the “information technology and transaction processing solutions business.” This shrank 13% while representing over 75% of the total turnover.
All the financial engineering also created a lot of long-term debt, $1.1 billion of it last December. That is down from $1.5 billion a year earlier. But it is still substantial and is now 8 times more than the market capitalization.
The Magic Is Gone for XELA Stock
Digital transformation turns out to be nothing but financial legerdemain.
A big but shrinking asset is bought with debt, then more promising operations with industry-leading buzzwords are layered on top. In this case, the asset was BancTec, which still does a lot of business, but has been superseded by other technologies. BancTec may continue to do business for years with management layering new operations and buzzwords on it, trying to cover up the cracks.
BancTec is a transaction processor acquired by SourceHOV in 2014. It is the key to the whole business of Exela. All of Apollo’s acquisitions, spin-offs and divestments since then have been designed to cover this shrinking part of the business with new, more exciting operations.
There is nothing illegal or even wrong about it. Taking cash out of possible investments worked for International Business Machines (NYSE:IBM) for decades.
The Bottom Line on XELA Stock
Exela said it got a $90 million boost last year selling BancTec services to a health insurer. This briefly made Exela stock hot, until investors saw how little bottom line impact it had. Later in the year, Exela benefited from a short squeeze. This year, it set up an office in Ireland.
Investors need to look closely at the press releases on these deals and ignore the hype of analysts meant to sell shares. If you find yourself falling asleep as you read them, avoid the stock. If it is really a good deal, the pros will find the value in it. If it is game changing, numbers will reflect it.
My guess is that Apollo will soon take Exela back into the financial repair shop. It will either be re-engineered with new buzzwords, or the parts will be sold for scrap. Either way, you don’t want it.
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On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
