XpresSpa Group (NASDAQ:XSPA) is one of the many consumer cyclical companies that have been tattered by the novel coronavirus pandemic and like so many members of that sector, XSPA stock needs multiple things to go right before it gets its groove back.
Moreover, XSPA is a highly volatile play on the airline industry and consumer spending rapidly returning to normal, assuming an effective Covid-19 vaccine comes to market. To say the stock has been turbulent this year is an understatement. It traded around $3.50 right before the U.S. economic shutdown, a scenario that sent XpresSpa shares to 15 cents.
After the economy started to reopen and it appeared carriers would enjoy a better-than-expected summer travel season, XpresSpa got ahead of itself. From the aforementioned 15 cents nadir, the stock flirted with $9 in early June. Then along came the second wave of coronavirus cases, taking the stock down to the $3 neighborhood.
Alone, that volatility might scare off plenty of investors. What’s really scary is that the pandemic is a plausible excuse for XSPA stock woes, but not the only issue confounding the company. The stock was struggling coming into 2020, before the coronavirus was part of the everyday lexicon and for close to seven years, the name’s been nothing mostly a destroyer of value, not a creator of it.
A Lot Needs to Go Right
XpresSpa’s primary revenue source can be deemed “airport indulgences,” which is to say the company operates mini-spas in airports and sells fancy neck pillows and related accessories in those venues. So even in a thriving economy, the company is providing highly discretionary services and products that many travelers simply don’t need.
However, this isn’t a thriving economy and the current version of the airline industry isn’t anything close to what investors and passengers saw as recently as 2019. For any airport-based business, whether it’s a McDonald’s (NYSE:MCD) franchise, a Starbucks (NASDAQ:SBUX), a Hudson News (NYSE:HUD) or an XpresSpa location, it’s reasonable to assume these businesses are suffering because airlines themselves are suffering.
Look through the second-quarter earnings report of major domestic carriers and the refrain echoes throughout: traffic was punished by Covid-19, capacity reductions are in order and the current quarter is going to bring another major year-over-year bookings plunge.
Compounding XpresSpa’s woes are surveys confirming that many travelers are simply afraid/reluctant to get on a plane until a Covid-19 vaccine comes to market.
In order to get excited about XSPA stock, investors need to be able to check all of the following boxes: an on the market vaccine, major improvements in airline booking numbers and upticks in consumer confidence and spending. It’s likely to be sometime in 2021 before a vaccine is ready to be distributed in large numbers and probably 2022 at best before airline capacity trends get anywhere close to 2019 levels. Those are long time frames to wait with a risky name like XpresSpa.
A point of interest with XpresSpa is that the company is looking like a leopard trying to change its spots. Translation: it’s looking to leverage its airport spaces as coronavirus testing centers.
This is a fine idea, assuming the company can execute, but that execution is going to take time. For now, XpresSpa can run 500 tests a day, but that’s a microscopic percentage of what’s needed.
To put how far off the testing needs XpresSpa is, in a normal environment, the Federal Aviation Administration’s (FAA) Air Traffic Organization (ATO) services 2.7 million passengers per day. More testing is certainly needed, but as it’s currently structured, XpresSpa isn’t a valid Covid-19 testing name for investors. It’s a vulnerable consumer cyclical stock until proven otherwise.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.