In late March, XpresSpa Group (NASDAQ:XSPA) announced that it was pivoting its business to providing coronavirus testing in airports. XSPA stock rallied 127% on the news. Though the stock would give back nearly all of those gains over the following week, the rally had begun.
By June, XSPA stock was on a tear. After rallying 250% in three and a half sessions, it had risen more than 20x from late March levels. That spike proved to be the peak, however, and the stock has steadily slid since. Still, at $2, the stock is up over 300% from its pre-pivot levels.
For two reasons, the rally makes some sense. First, there seems to be real need for those testing services in airports (and, of course, everywhere else). Second, XpresSpa’s old business of providing airport spas was in big trouble.
After all, any in-airport business is facing significant near-term challenges. Hudson (NYSE:HUD), a well-known operator of airport convenience stores, just agreed to sell itself for half the price at which it entered 2020. A high-touch business like airport massages would have little chance of surviving the next few years. That’s a key reason why XSPA stock plunged in March, and why the company had to execute a reverse stock split this summer.
But even with the fade from June highs, there’s still a key stumbling block for XSPA stock. It’s not at all clear what XpresSpa Group is going to do longer-term even if near-term plans succeed. That leaves the company with seemingly a short amount of time to make a still-substantial amount of money. It seems like too much to ask.
What’s the Plan?
Assume that XpresSpa is successful in creating in-airport testing stations for the novel coronavirus. Success certainly isn’t guaranteed, but the company is making progress. It’s signed deals with airports including New York City’s John F. Kennedy, a deal that sparked the June buying frenzy in its stock. And it has agreed to install rapid testing equipment from Abbott Laboratories (NYSE:ABT).
From the time that business becomes profitable, how long does XpresSpa really have? It’s a difficult question to answer. Certainly, the coronavirus isn’t going to suddenly go away. But the environment outside airports is hardly static at the moment.
Indeed, billions of dollars are going to research and development of vaccines, treatments, and, importantly, testing. Success for any of those efforts is going to limit the value of XpresSpa’s in-airport options.
If any of the myriad firms looking to create a vaccine are successful, fewer travelers will see the need for a test. Improved treatments too would limit the sense of urgency.
But it’s better testing that seems to provide the biggest risk. If a flyer can get an at-home and/or rapid-response test from a company like OraSure Technologies (NASDAQ:OSUR), Abbott, or Sorrento Therapeutics (NASDAQ:SRNE), why exactly do they need to get tested in the airport?
Airport employees admittedly present a captive audience. But after significant dilution, XpresSpa now has a market capitalization of $125 million. It needs to create at least that amount of profit simply to support the current stock price. Airport employees at $5 or $10 a test hardly seem like enough.
The Next Move
The simple answer would be that once some level of normalcy returns, XpresSpa can go back to its previous business. More likely, it can do both.
The problem is that the previous business, simply put, was not a success. The company did manage to drive some revenue growth before the pandemic: same-store sales rose 2.9% in 2019. That’s not particularly impressive given that U.S. passenger traffic increased 4.1%.
More worrisome is the fact that XpresSpa wasn’t profitable, or close. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss was $3.3 million last year. That was actually modestly worse than the year-prior performance.
To be fair, the business is relatively new. But XpresSpa’s older businesses didn’t work all that well, either. A wireless charging effort failed. Before that, the company was a patent play named Vringo that lost a key case against Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL).
This time has to be different. Post-Covid, it’s not clear how it will be.
The Thin Case for XSPA Stock
To own XSPA stock even after the big pullback, investors need to believe that the company can make at least $100 million off its testing efforts — or that it can find a viable business after that.
On both fronts, skepticism is warranted. By the time the testing business gets off the ground across the company’s 51 airports, significant progress hopefully will have been made in the fight against the coronavirus. And if the spa business isn’t viable, or all that valuable (and bear in mind that the company entered 2020 with a valuation of about $12 million), the company needs a new business model to create value.
It’s an open question as to what that model will be, or could be. But it’s a question investors need to answer before even considering taking a position in XSPA stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.