Over the past few months, I’ve read a lot of negative analysis on XpresSpa (NASDAQ:XSPA) – the airport spa company that’s sharply pivoted to roll-out novel coronavirus testing centers at airports – and red-hot XSPA stock.
I get the pessimism and the doubt. I really do. After all, what does a company that operates small retail spa locations know about administering Covid-19 tests?
Ostensibly, XSPA stock just looks like just another pump-and-dump penny stock that’ll go bust once the Covid-19 testing hype fades.
But it’s not. The naysayers are wrong.
XpresSpa is doing everything right today to put itself in a great position to succeed as a large Covid-19 testing company, with widely used rapid test centers across all of America’s busiest airports.
And the big rally in XSPA stock may actually just be getting started. Here’s why.
The Big Idea
The big picture bull thesis on why XpresSpa can turn into a large Covid-19 testing company breaks down into four components:
- Rapid Covid-19 testing centers in airports will become ubiquitous.
- XpresSpa will leverage its existing network of airport retail locations and ample financial firepower to quickly establish itself as the first testing center in many of America’s busiest airports.
- XpresSpa is bringing in the right group of medical professionals to ensure that these testing centers operate safely, accurately and efficiently.
- There is huge upside potential in XSPA stock as XpressSpa rolls out just 30 of these testing centers (the company is already at two today, in just 2 months).
The Right Product
Make no mistake. The “new normal” for airports will include Covid-19 testing centers.
That’s because this virus is simply far too widespread to stomp out over night, even with an effective vaccine. We will, unfortunately, be living with Covid-19 in some capacity for the foreseeable future. To that extent, we will also be living with Covid-19 prevention measures for the foreseeable future, and some of them will be with us forever.
Covid-19 rapid tests in airports seems like one of those forever things. They are simply a low-friction, easy-to-implement way for airlines to keep their personnel and travelers safe.
I’m not saying every time you step on a plane, you’re going to have to take a Covid-19 test. Such tests will likely be entirely optional for travelers, especially as virus risks moderate. But, for the foreseeable future, they will likely be part of the mandatory check-in process for airline personnel, simply as a preventive measure for airlines to keep travelers safe and reduce Covid-19 spread.
To that end, I see Covid-19 testing centers in U.S. airports reaching ubiquity over the next few years.
A Solid Starting Point
XpresSpa wants to be “the company” for Covid-19 testing centers in airports.
Big goal. It will be tough to execute. But, fortunately for bulls, XpresSpa can pull it off, and one big reason why is that the company is launching this new initiative from a solid starting point.
The company operates 51 spa locations across 25 different airports, and 32 of those locations are domestic. Of those domestic locations, XpresSpa has exposure to 80% of all U.S. air travel. No one else in airport retail has this much exposure to U.S. air travel. When it comes to in-airport spa retail locations, XpresSpa has 60% market share.
Further, all of those locations are in easily accessible terminals, and can be quickly converted into testing centers with a few free-standing walls and testing kits. The company’s employees are already TSA-security approved, so they can be trained and deployed quickly across all of America’s airports.
In other words, XpresSpa has the best underlying infrastructure to service the in-airport Covid-19 testing center market.
Equally as important, XpresSpa has cleaned up its balance sheet over the past few months. Specifically, the company has raised more than $40 million so far this year, with another $40 million raise possible through the exercise of warrants. At the same time, the company has dramatically reduced its debt load.
With a debt-reduced, cash-boosted balance sheet, XpresSpa now has the financial firepower to invest in converting its spa retail locations into testing centers, bring on new talent to run these centers and create robust technology infrastructure to support these new operations.
Bringing in the Right People
The second big reason XpresSpa can pull off its Covid-19 testing center goal is that the company is bringing in the right people.
Pundits are quick to point out that XpresSpa is traditionally a massage company. Masseuses are great. But they can’t safely and accurately administer Covid-19 tests.
So, if XpresSpa does want to become a Covid-19 testing company, management needs to bring in new talent.
That’s exactly what they are doing.
XpresSpa tapped Lewis Lipsey as chief medical director to head the whole testing center initiative. He’s a legit person in the medical space. Yale grad. Residency at Harvard. Fellowship at UC San Francisco. Attending physician at multiple New York City hospitals.
Additionally, the company has gone on a hiring spree for its testing centers in New York and New Jersey, looking for full-time medical assistants and nurse practitioners to run those testing centers. And, because the company has beefed up its balance sheet with over $40 million in cash (and potentially another $40-plus million on the way), XpresSpa has sufficient financial resources to hire a bunch of these medical professionals (the average nurse practitioner salary is roughly $100,000).
So, XpresSpa isn’t a team of masseuses giving Covid-19 tests. The company has beefed up and expanded its payroll so that well-trained medical professionals are doing these tests.
Tons of Upside Potential
The exciting thing about XSPA stock is that XpresSpa doesn’t need to do anything super miraculous in order for the stock to be a multi-bagger.
XpresSpa basically has two testing centers today. One launched in late June at JFK International Airport in New York City, with testing capacity of 500 tests per day. The other will launch soon at Newark Liberty International Airport, with testing capacity of 350 tests per day.
The Newark launch is important, because airport officials would not have signed a contract with XpresSpa in August unless the JFK roll-out was going smoothly. So, clearly, XpresSpa is strongly establishing proof-of-concept in the testing center marketplace.
Of equal importance, this means XpresSpa now has two testing centers in essentially two months. As proof-of-concept increasingly becomes established and corroborated, big growth could follow. You could see XpresSpa start to rapidly roll out dozens of testing centers across various airports throughout America.
I think it’s likely that XpresSpa grows from two testing centers today to 30 within the next 24 to 36 months (if not sooner). Each one of those centers will likely process about 500 tests per day, implying total testing capacity of 15,000 tests per day. Given that 15,000 tests represents just 2.5% of America’s daily average air traveler volume, I think it’s quite likely that XpresSpa fills its capacity every day.
Covid-19 tests cost about $100 per test.
If XpresSpa runs 15,000 of those a day for a whole year, you’re talking about $550 million in annual revenue.
A market-average 2-times sales multiple on that implies a potential future market cap of $1.1 billion for XSPA stock. The market cap today hovers around $200 million.
Bottom Line on XSPA Stock
The pundits are vocal about XSPA stock. It’s a pump and dump penny stock that you should avoid – or so they say.
I see their argument. And I think it’s flawed. It lacks scope, context and foresight.
In markets, innovation tends to win out. And with XpresSpa, I see an innovative company executing strongly against a huge long-term opportunity.
Does that mean XSPA stock is a sure thing? No. Far from it.
XSPA stock is still very risky. It’s not for your lunch money. But I think the pros far outweigh the cons, and that XSPA stock has a visible and compelling opportunity to be a multi-bagger in the long run.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.