XpresSpa Group (NASDAQ:XSPA) has been on a rollercoaster ride since the pandemic struck. XSPA stock made its way beyond $8 per share earlier this summer but has since cooled down to $2.92 per share in recent weeks. The firm, best known for its airport-based mini-spas, has become somewhat of a pandemic play as it works to diversify into an on-site testing facility.
But should investors be betting on pandemic stocks as they continue to price in a swift recovery? The answer is tricky.
The past few days have offered a mix of worrisome and encouraging news regarding the novel coronavirus. On one hand, the virus seems to be spreading rapidly in several U.S. states, causing increased worries about its economic toll on the nation. But it seems investors are keen to take a glass-half-full attitude by focusing instead on news that drug makers made progress toward a vaccine to combat Covid-19.
XSPA Stock Is a Bet on Both Futures
Buying XSPA stock might feel like a good way to play both potential outcomes – one in which we have to live with the virus long-term, and one in which we are able to eradicate it completely. XpresSpa’s business offering massages and other treatments depends on close contact between people. And, its location within airports makes it even more vulnerable to the impact of Covid-19 on travel.
However, in an effort to insulate itself from the economic fallout caused by social distancing, the company made the wise choice to shift its strategy toward Covid-19 testing. Now, the firm is hoping to set up testing facilities within airports to help screen travelers for the virus. That means a world in which we have to learn to live with Covid-19 will require XpresSpa’s testing facilities.
What’s not to love? That attitude is what caused the stock to spike back in June. But a more careful examination into XSPA stock’s strategy shift raises several red flags.
Can XpresSpa Step Up?
First, there’s a question of whether the company can make the jump from a spa to a medical-testing site. As InvestorPlace’s Josh Enomoto pointed out, the firm’s capacity is peanuts compared to what’s required in an airport.
XpresSpa claims that it has the capacity to process 500 tests a day […] According to the Transportation Security Administration, the agency screened over 755,000 airline passengers on July 6
Enomoto’s calculations suggest the company would need to triple its capacity at each testing site to serve the current passenger load. If traveling becomes safer because of the increased testing, XpresSpa will struggle to keep up.
Plus, it’s unclear exactly how the company fits into the testing demand. The firm claims its testing sites will be used by airport employees from pilots to workers and border protection agents. But many healthcare companies and government agencies already offer free Covid-19 testing. This makes it unlikely that airport employees or the companies they work for would be willing to pay.
Not only that, but XpresSpa has no experience in the coronavirus testing arena. News that several big-name drug makers are struggling to administer accurate tests, it unlikely that a health spa that’s completely new to the space is going to do a better job.
Spas Are in Danger
If a vaccine does become available in the near-term, XpresSpa will lose out on its investment in Covid-19 testing. But the company can still fall back on its mini-spa business, right? The answer to that is complicated – but in short – no.
A vaccine won’t just wipe the threat of Covid-19 from the planet. Aside from the manufacturing and distribution challenges, you also have to get people to take it. There’s bound to be a percentage of people skeptical about a vaccine that was rushed to production. Plus, it’s likely to go to first-responders and key workers before it makes its way to the public.
Finally, travel will take a long time to resume even without the threat of Covid-19 because financial pressure will cause businesses and households to cut back on big trips. The kinds of people paying for a massage in the airport are typically business travelers, who will be passing by in much smaller quantities for years to come.
The Bottom Line on XSPA Stock
There’s certainly an argument to be made for XSPA stock – especially if you believe the company will be able to successfully pivot into a testing site. Yes, there are plenty of clinics offering tests for free, but they are often short of supply. This leaves people untested for long periods.
Plus, XpresSpa job postings for Newark suggest the company plans expansion in the weeks ahead. While that’s far from a reliable way to make an investment, it does add a speculative angle to XSPA stock for traders willing to watch the news and buy and sell quickly.
All in all, the average long-term investor probably shouldn’t go near XSPA stock because the case for success a few years down the line looks thin.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.