Amid the chaos that the novel coronavirus caused, many businesses found themselves drowning against an unforeseen tidal wave. Thus, you can’t help but admire XpresSpa (NASDAQ:XSPA). Management could have temporarily called it a day, hoping for the best. Instead, the leadership team aggressively changed their business model to adapt to the new normal. As a result, XSPA stock has been one of the surprising winners of this year.
Again, I tip my hat to the organization. As you know, XpresSpa is a health and wellness firm, specializing in spa and beauty centers located in several major airports. In the pre-pandemic days, it represented an ideal business model – serve the needs of frequent flyers and business travelers as they unwind during long layovers. With multi-year low unemployment levels and stock market valuations at record highs, things couldn’t look better for XSPA stock.
Then the coronavirus happened. Because of its health implications, the Covid-19 pandemic imposed a two-front attack. First, it reduced air traffic to a fraction of what it was last year. Second, multiple state governments restricted businesses involving face-to-face contact. Not that there was much enthusiasm from the public to receive those services when the virus struck.
But instead of crying over spilled milk – even if it didn’t spill itself – XpresSpa rolled up its sleeves and proposed something radical: convert their spas into Covid-19 testing centers.
If Wall Street handed out awards for moxie and tenaciousness, XSPA stock would sweep the table. Really, this is the audacity that makes America great … not again, just great. But it also raises an obvious question: does XpresSpa have any competencies toward this arena?
It’s here that prospective buyers should exercise some skepticism.
XSPA Stock Faces Multiple Challenges
For starters, XpresSpa claims that it has the capacity to process 500 tests a day. That would be adequate if you were testing a small parochial high school. But that’s not going to cut it for a major airport.
According to the Transportation Security Administration, the agency screened over 755,000 airline passengers on July 6. Granted, that’s across the entire U.S. But even if you averaged out this figure by the number of commercial airports in the U.S., 500 is still an inadequate capacity.
Plus, if passenger volume continues to move higher like it has, XpresSpa would have to exponentially increase its testing capabilities to make this business transition practically sensible. Should investors see this move as a gimmick, that could pose problems for XSPA stock.
But the biggest challenge I anticipate for XpresSpa is the rising number of coronavirus cases. To be fair, this is a cynical catalyst for XSPA stock in that our country needs more testing facilities to bolster confidence in the fragile economy. However, the virus could very easily dampen travel demand, especially for air travel where you’re stuck in a flying tube with potentially hundreds of other passengers.
Moreover, the specific dynamics of the U.S. travel industry are not favorable to XSPA stock in the context of Covid-19. First, business travel has been gutted due to the emergence of remote work platforms and teleconferencing. Besides, there’s no point in corporations risking the legal liabilities involved in sending their employees in flying Petri dishes.
If the current outbreak worsens, you can expect businesses to further delay their travel plans.
Second, the market share of leisure travel has increased noticeably since the Great Recession. But with the pandemic’s resurgence, individual airline passengers have little incentive to travel, reducing overall volume.
Where to Go?
Don’t get me wrong – I appreciate XpresSpa’s creativeness in the wake of an unprecedented crisis. If the company is successful in pulling this off, the transition would go down as one of the greatest tactical maneuvers in business history.
But as far as XSPA stock is concerned, I believe this is a bet on the coronavirus’ trajectory. Since we still don’t know much about the virus and because a vaccine is probably at least a year away, I don’t want to expose myself too heavily here.
Yes, Americans could just “get over” this virus. But look at where this attitude apparently got us. And even if more people adopted this sentiment, where would they go? What would they do? Several states are pausing their reopening measures or rolling them back. The European Union made news recently when it imposed a travel ban on American tourists.
Thus, even considering a best-case scenario for the coronavirus, other factors impede travel demand. And that has a direct impact on XSPA stock. Based on the rising number of negative-leaning variables, I’m going to sit this one out for now.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.