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Exela Has A Wide Moat

Sep. 12, 2019 2:59 PM ETExela Technologies, Inc. (XELA)35 Comments
WY Capital profile picture
WY Capital


  • Exela has several competitive advantages that should block out competition and lead to good revenue stability.
  • The bull case has a high chance of playing out, according to our projections.
  • The extremely low valuation doesn't reflect the unique characteristics of Exela's situation.
  • Management is buying back shares, which increases our confidence in the bull case.

Ever since one reader brought up the potential risk of competition for Exela (NASDAQ:XELA), we had always wondered: Is Exela really so vulnerable to competition? Today, we can finally answer this question. No. Exela has a substantial moat that protects it from competition, and this makes its bull case clearer than ever.

Why having a competitive advantage is important

Exela does not have a lot of flexibility because it has substantial debt due in 2023 and very little cash on hand. If a competitor entered the market and caused Exela to bleed cash for even a few quarters, it would be all over for Exela shareholders.

However, after doing our due diligence, we have discovered that Exela actually has significant competitive advantages. We believe these advantages are key to achieving the bull case and unlocking shareholder value, as they help in maintaining revenue stability and give more flexibility to management.

Competitive advantages

We believe Exela has substantial switching costs, intangible assets (brand and possibly IP), and low costs from efficiencies of scale.

We believe Exela has substantial switching costs as its solutions are frequently mission critical and highly integrated with its customers. According to Exela’s 10K, ~5000 employees work as customers in an onsite capacity. Many of its solutions also involve storing, processing and handling sensitive information and helping with other day-to-day operations. Some of the customers are in industries where switching can have a devastating impact on operations, such as healthcare.

Exela is also likely to have substantial intangible assets. According to the 10K, it has long-term relationships with many of the largest companies in the Fortune 100. This has led to stable and recurring revenues (from 10K 2018):

We have successfully leveraged our relationships with customers to offer extended value chain services, creating stickier customer relationships and increasing overall

This article was written by

WY Capital profile picture
Looking out for underrated companies that could shape the future of humanity, or just provide strong returns over the long run. Note that my opinions could change after conducting more research or based on anything, honestly. DYODD

Analyst’s Disclosure: I am/we are long XELA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (35)

Boris J profile picture
I think the moat flooded.
CR144 Research profile picture
Buy XELA !
why? sorry but I have watched too many folks recommending this as a "buy" at $7, $4, $3, $1.25 and now at $0.85?
I enjoy your perspectives. Look forward to reading the article.
@WYCapital - Why have you changed ur opinion? Isn’t there great upside from here if a $2 privatization were to unfold?
WY Capital profile picture
@Pilatus Joe
Still long but I've looked at the background of Par and it isn't good. Going to write an article about this.
I just don't see it. The stock has gone from $7 to $4 to $3 to $1.25. Sorry but you may be catching a falling knife with this one. Exela is incenting clients to pay their bills in 2-3 weeks vs net 45 or net 60 because they have a significant liquidity issue. They are short paying vendors and, are 6+ months behind in paying their agreed management and staff incentives.
WY Capital profile picture
Any evidence for this? From everything I've heard from management liquidity seems perfectly fine.
Direct experience. Seen all of the above as recently as Q2 and into Q3.

Let me ask. What was your assessment of Exela when they were trading at 7? 4? 3? Sorry but something about your over optimistic view rings hollow.
WY Capital profile picture
So you work for them? What position do you hold?

"Let me ask. What was your assessment of Exela when they were trading at 7? 4? 3? Sorry but something about your over optimistic view rings hollow."
#1 rule of investing is past performance doesn't equal future results. There are numerous examples of companies that have cratered only to have soared to new highs.
Praveen_Chawla profile picture
Is there a list of customers and solutions? Obviously the market does not beleive there is any moat and the company is burning cash. Instead of buying back shares the company should be reducing debt esp. given the debt is very expensive.
The company seemed to priced like an option on survival.
WY Capital profile picture
@Praveen Chawla
If the market believes the bull case the stock wouldn't be trading this low. Anyways the company is generating cash to the tune of $10mil net cash flow in Q2. There is some risk of bankruptcy but we think its very low and pretty much nil if the credit markets remain stable.
Praveen_Chawla profile picture
FCF is very erratic and the company has not strung together two quarters of positive FCF. Given the size of debt this is concerning.
What operating margins are you projecting in your model?
WY Capital profile picture
@Praveen Chawla
The company is undergoing restructuring to make itself more profitable. I don't model operating margins, but I'm modelling an adjusted EBITDA margin of 26% by 2022 for our bear case.
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