Exela Technologies (XELA) is a global leader in digital business process services and data-driven business innovations. The company operates through Information & Transaction Processing Solutions (ITPS), Healthcare Solutions (HS), and Legal & Loss Prevention Services (LLPS) segments. Over the past year, the stock has surged 59.3%, driven primarily by increased adoption of the company’s Digital Assets Group solutions by small and medium businesses (SMBs) amid remote working trends. XELA’s newly introduced Robotic Process Automation (RPA) platform, as well as its Digital Mailroom platform in the U.K., should help the company drive continued operational and business improvement.

However, XELA’s stock is down 14.9% over the past three months. Also, the stock is currently trading 76% below its 52-week high of $7.82, which it hit on March 10. Although the company’s gross margin and adjusted EBITDA margin improved year-over-year in its  last reported quarter, it suffered a substantial net loss. Furthermore, XELA’s Information and Transaction Processing Solutions segment revenue declined 18.4% year-over-year to $231.9 million in the first quarter of 2021.

While the accelerating demand for its digital solutions and cloud hosted services could be a silver lining for the stock, XELA’s unstable financials and weak profitability could lead to bearish investor sentiment.

Here is what we think could influence XELA’s performance in the upcoming months:

Expansion of Digital Platforms

Last month, XELA delivered  its Robotic Process Automation (RPA) platform to  a large health insurance company. While the platform is already being utilized by customers in industries like banking, finance & accounting and the public sector, this move will automate the healthcare claims processing services for the insurance company. Also recently, the company extended its  Digital Mailroom (DMR) platform for online signups for small and medium businesses (SMBs) in the U.K. This will enable the company to cater to a growing customer base in the European market.

Unstable Financials

XELA’s total revenue declined 17.9% year-over-year to $300.1 million in the first quarter ended March 31, 2021, attributable primarily  to the lower volumes of strategic asset sales because of the pandemic. The company’s operating income came in at $4.3 million, compared with a $2.2 million  operating loss in the first quarter of 2020. However, its net loss increased 208.7% year-over-year to $39.2 million over this period. In fact, the company’s long-term debt stood at $1.5 billion as of March 31, 2021, while cash equivalents at the end of the period stood at $23.74 million.

Its 21.8% trailing-12-month gross profit margin  is 55.2% lower than the 48.6% industry average. Also, XELA’s levered free cash flow  and EBITDA margins of 0.9% and 6.6%, respectively, are 93% and 54% lower than the industry averages. Also,  its ROTC and ROA are negative 0.5% and 18.6%, respectively.

Consensus Price Target Indicates Potential Upside

The $4 consensus price target  represents a 112.8% potential upside from yesterday’s closing price of $1.88.

POWR Ratings Reflect Uncertainty

XELA has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. XELA has a C grade for Quality. The stock’s lower-than-industry gross profit margin is in sync with this grade.

XELA  has a Growth grade of C, which is in sync with its inadequate growth prospects. In terms of Value Grade, XELA has a B. The company’s 1.30 EV/Sales ratio, which is 69.5% lower than the 4.26 industry average, is consistent with the grade.

In addition to the grades we’ve highlighted, one can check out additional XELA ratings for Momentum, Stability, and Sentiment here. XELA is ranked #54 of 101 stocks in the D-rated Financial Services (Enterprise) industry.

Click here to view the top-rated stocks in the Financial Services (Enterprise) industry.

Bottom Line

Robust growth by  XELA’s digital asset group and expanding digital capabilities to better serve its large customer base have  contributed to significant improvement in its core business. However, the company’s weak balance sheet and negative profit margin could limit its growth in the near-term. So, we think investors should wait for its finances to stabilize before investing in the stock.

XELA shares rose $0.09 (+4.79%) in premarket trading Tuesday. Year-to-date, XELA has gained 50.89%, versus a 16.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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