XpresSpa Doesn’t Look Any Better After Its Reverse Split

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The post-coronavirus market is seeing increased trading interest in a broad range of stocks looking to capitalize on the pandemic, including airport spa company XpresSpa (NASDAQ:XSPA). XSPA stock is currently hovering at $3.70.

XSPA Stock: XpresSpa Doesn't Look Any Better After Its Reverse Split
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Yet, until this year, not many investors would have necessarily paid regular attention to the New York-based company’s daily trading activity.

You might know XpresSpa as the company that offers massages and facials at airports. XpresSpa says it serves nearly 1 million travelers annually in the U.S., Holland and the United Arab Emirates.

Its core business is reliant on airports being fully operational and passengers flying.

But the novel coronavirus outbreak changed management’s focus. Now XpresSpa plans to offer testing for Covid-19 at its airport locations. And that has meant interest in XSPA stock.

There is considerable hype surrounding stocks that seem to have a newfound niche in offering coronavirus-related service or products. However, I do not believe XpresSpa stock should belong in a long-term portfolio for such a reason.

Here’s why.

Management Is Not Hopeful About Testing

In late June, management announced a pilot program to test airport employees at New York’s John F. Kennedy International airport. InvestorPlace contributor Larry Ramer has recently written in detail about the potential difficulties that would be faced by XpresSpa as it starts to offer fee-based coronavirus tests at airports.

In addition to his piece, I’d urge potential investors to read the group’s 8-K filing of June 17 with the Securities and Exchange Commission. It states:

“We have no operating history in the diagnostic testing industry. We have no formal contracts or relationships … with any laboratories for the performance of, COVID-19 testing. There can be no assurances that we will be able to successfully secure new locations or transition our existing spa facilities into locations at which COVID-19 testing will be ordered or performed.”

The filing continues, “If there is little or no demand for the COVID-19 test, our business could be materially harmed… Our capital expenditures may not generate a positive return and we will incur significant additional costs.”

Any potential long-term investor in XSPA stock would benefit from studying this filing with the SEC rather closely. Management has laid out a strong case as to why it would not be prudent to invest in the company’s shares based on the hype of potential Covid-19 testing at airports.

The Recent Reverse Split Is a Warning

Furthermore, earlier in June, management announced a 1-for-3 reverse stock split that took effect after the market close on June 10. A reverse stock split is a conventional stock split in reverse; instead of a company amending its charter to have more shares authorized and outstanding, the charter is amended to dramatically reduce the number outstanding shares.

Many penny stocks do a reverse stock split at some point in their trading history. They either do not want to be delisted from the stock exchange or would like their stock price to not look very cheap, especially in the eyes of potential institutional investors. In the case of XSPA stock, without a reverse merge, a delisting would have been a probability in the near future.

But reverse splits are rarely successful, according research by led by Karyn L. Neuhauser at Lamar University. She writes:

“Using a sample of 1206 reverse split stocks during the 1995–2011 period, we find only 500 reverse splitting firms are able to survive on their own for five or more years. Of the 706 firms that are unable to survive independently, about 20% are acquired by another organization while 80% get delisted for other reasons, usually due to an inability to meet listing requirements or bankruptcy.”

These numbers should possibly be another warning for potential long-term investors in XSPA stock. The company may not even be able to exist in its current form in the near future.

What Else Could Derail XSPA Stock?

On July 6, XpresSpa provided a business update and notified investors that it had filed its first-quarter report with the SEC. Total revenue was $7.7 million compared to $12.2 million in the prior year first quarter. Because the company closed all its spas on March 24, comparable store sales decreased 26.5% for the first quarter 2020. Net loss came at $10.7 million compared to net loss of $2.8 million a year ago.

According to the preliminary air traffic data for April 2020, released by the U.S. Department of Transportation, there has been a 96% reduction in U.S. airline passengers from 2019. Numbers for May and June are likely to show comparable yearly declines.

Therefore, XpresSpa’s business in the second quarter of 2020 will have suffered greatly. And without revenues, it is not easy to make an investment case for XSPA stock.

In its results for the first quarter, management also highlighted “the ultimate impact of the COVID-19 pandemic and the Company’s newly launched brand, XpresCheck, on its results of operations, financial condition and cash flows is highly uncertain, and cannot currently be accurately predicted.”

I believe management has recently given enough reasons for long-term investors to not buy XSPA stock.

The Bottom Line on XSPA Stock

Until the novel coronavirus disrupted lives and put the country in a lockdown, many airline passengers knew XpresSpa as a popular airport spa brand. But over the past few months, investors have witnessed attempts by management to utilize the group’s empty space at airports for Covid-19 testing.

It is possibly aiming to capitalize on the new trend of offering coronavirus-related products and services. However, that attempt is still in its infancy. Meanwhile, the company’s traditional airport spa business brings close to no revenue.

Potential investors in XSPA stock should realize that the company may not be able to create much shareholder value in the near future. Let the buyer beware.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/xpresspa-doesnt-look-any-better-after-its-reverse-split/.

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