Business process automation (BPA) specialist Exela Technologies (NASDAQ:XELA) continues to ride the aftereffects of its reverse split late last week. However, such cynical moves present a perceptional risk, possibly deceiving some retail investors into believing that Exela cured its vulnerabilities. Unfortunately, management’s own statements don’t provide much confidence for XELA stock longer term.
In the immediate framework, the BPA enterprise ranks as the top trending ticker on Stocktwits. On Friday, Exela announced that its board of directors approved a 1-for-200 reverse split of XELA stock, to be effective 5 p.m. Eastern on that day. Following the split, management stated that there will be approximately 6.4 million shares of common stock issued and outstanding.
To be sure, the enthusiasm for XELA stock doesn’t lack some fundamental justification. According to The Business Research Company, the global BPA market grew from $12.4 billion last year to an expected $14.02 billion this year. Further, by the end of 2027, the sector should command a valuation of $22.94 billion.
At the moment, the market capitalization of XELA stock is $44.66 million. Theoretically, then, a massive total addressable market awaits Exela. However, actually getting there is a different story.
XELA Stock Incurs Several Risk Factors
While XELA stock may be flying high now, the Financial Industry Regulatory Authority (FINRA) offers a warning about the underlying mechanism:
“If a reverse split is announced and actually occurs, proceed with caution. Reverse splits tend to go hand in hand with low-priced, high-risk stocks. This is especially true with reverse splits that result in a post-split share price that is many times the price of the stock’s current price.”
Another factor centers on less-than-remarkable metrics used to gauge contrarian speculative interest. In particular, data from Fintel shows that the short interest of XELA stock is only 2.61% of its float. In fairness, the short interest ratio of 27.15 days to cover is very elevated. Nevertheless, XELA hits 50.50 in Fintel’s proprietary Short Squeeze Score, indicating only the average potential of a short squeeze materializing.
Finally, Exela’s own risk disclosures — found in its Form 10-K filing — presents some cause for concern. Specifically, it cites “substantial indebtedness” that might have a material adverse effect on its business. More tellingly, management stated that it “substantially increased the outstanding number of shares during 2022.”
Not only did this action substantially dilute existing shareholders’ interests in XELA stock, but management also states that it “may engage in dilutive transactions in the future.” Granted, the nature of a reverse split does not dilute ownership interests of existing shareholders. However, given Exela’s precarious financial position, future dilutive actions are not off the board.
Why It Matters
According to TipRanks, no analyst has covered XELA stock in the past 12 months. Frankly, the reason why could center on its horrific loss during that time frame. Data from Google Finance indicates that XELA hemorrhaged more than 99% of equity value in the trailing one-year period.
On the date of publication, Josh Enomoto 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.