The novel coronavirus appears to be slowing down a bit. In recent weeks, new cases are starting to roll over in the United States. However, it’s simply too early to know whether or not there will be another big wave of cases this winter. This leaves XpresSpa (NASDAQ:XSPA) stock in an uncertain situation.
As you may know, XpresSpa originally focused on offering spa, massage, and related services at various airports. It was reasonably successful at this over the past three years. However, the pandemic caused XpresSpa to temporarily shutter its locations.
That’s not surprising, as authorities haven’t deemed spa services to be essential goods. Besides that, there are hardly any passengers to take care of anyway.
With XpresSpa stock plummeting, it looked like it might be the end of the line for the company. However, management cleverly pivoted into airport-based Covid-19 screening. With that, the stock soared and gave XpresSpa a new lease on life.
Now, though, shares are sliding again. Where do things stand for investors heading into the fall?
Newark Facility Opening This Week
While XpresSpa’s momentum has been flagging, there is a positive development coming soon. That is that XpresSpa’s testing facility is set to kick off operations this week at the Newark Liberty International Airport. XpresSpa’s services consist of six separate testing rooms. The company anticipates being able to test 350 or more people per day with this location.
At first, XpresSpa will offer testing to airport employees, customs agents, and other such personnel. Once things are up and running, XpresSpa envisions offering testing to the general public as well. Notably, the company says that its test site at the JFK Airport in New York has been successful. That, in turn, has given the company the confidence in rolling out this site in Newark as well.
Spa Business Was More Proven Than This One
We’ll see how this goes as a line of business for XpresSpa. I’m somewhat skeptical that testing a few hundred people a day for Covid-19 is a long-term winner. Remember that XpresSpa was a reasonably successful business prior to the virus. In each of the past three years, XpresSpa generated around $50 million in annual revenues.
Yes, it hadn’t reached profitability. But it had a solid top-line business there. You can imagine a world where airport spa services took off; XpresSpa had already demonstrated considerable customer demand for the product. It had a bunch of locations and could conceivably scale it up with many more in the future. The business model inherently makes sense.
This testing business, by contrast, feels like starting over again from square one. And unlike the spa business, this is a limited-time play. Sooner or later, it seems probable that scientists will come up with a vaccine or other more permanent method of keeping Covid-19 at bay. Even if it takes a while, there is likely to be far less demand for testing services than there was for spas.
Perhaps there will be prolonged interest in testing in general as authorities try to stave off future pandemics. Still, this doesn’t seem like the basis of a big long-term business. I applaud XpresSpa’s resourcefulness for turning their facilities into something useful during the interim. However, once the virus dies down, I expect the Covid-19 revenues to dry up. And at 350 passengers a day at the Newark facility, we seemingly aren’t talking about a major business as it stands now.
XSPA Stock Verdict
I suspect that investors are a little too excited about XpresSpa because of the Covid-19 angle. Unlike, say, the vaccine companies, this seems like a temporary Covid-19 inspired move at best.
InvestorPlace’s Larry Ramer recently raised some important questions about the airport testing model. For one, with free tests increasingly common, there may be significant pricing pressure on XpresSpa’s offering. Also, Ramer rightly asks, can XpresSpa provide a totally reliable and high-quality testing environment given its lack of previous experience in this field? Massages and health care procedures are rather different businesses.
Perhaps the best news for XSPA stock is that it raised $40 million in a secondary offering recently. That gives it a long runway to keep the business running even with travel shut down. Recall that XpresSpa previous generated about $50 million per year in sales. Thus, while that is largely gone for 2020, it replaced nearly all of that with the proceeds of the secondary offering. And, of course, with the spas shut, many variable costs are gone for the time being.
So, the good news is that XpresSpa will have the funds to keep going until something approaching normal passenger traffic is back. However, I’m far from convinced that the airport testing business is going to be a big winner. And with that in mind, traders should be careful with XPSA stock here.
At the end of the day, XpresSpa is likely going to have to transition back to its previous line of business sooner or later. And given that it wasn’t profitable prior to the pandemic, it will take a while for XSPA stock to reach stability in the new post-Covid world.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
