XpressSpa (NASDAQ:XSPA) looks increasingly less appealing than it may have at first to some. Now’s probably not a great time to invest in XSPA stock for a couple simple reasons.
Imagine that a friend of yours asks you to invest $10,000 in his or her business which has been opened for a few months. And when you asked how much revenue the business was generating and how much cash the business was burning, your friend refused to answer the question.
That’s close to the situation we have now with XpressSpa. During the company’s Aug. 19 second-quarter earnings conference call an analyst asked XpresSpa CEO Doug Satzman whether he could provide “a sense of your current cash burn.”
Satzman disclosed the monthly cost of the company’s spa business which is now shut down, noted that it had spent “a little over $2 million” on setting up its airport novel-coronavirus testing business, and reported that the company’s working capital at the end of Q2 was $25.8 million.
But he did not say what the company’s cash burn was since launching its testing business or even give any real concrete indication of what it was.
A Closer Look at XSPA Stock
XpresSpa opened a pilot testing facility at New York City’s JFK Airport on June 29 and launched a testing facility at Newark Liberty International Airport on Aug. 17. So the company’s CEO effectively avoided answering the question of how much cash its airport COVID-19 testing business had burned in Q3.
I subsequently gave the company another opportunity to provide financial data on its airport-testing business. In an e-mail to the company’s Investors’ Relations representative on Aug. 24, I asked for “numerical third-quarter data or guidance” or (in case I had overlooked a data point that XpresSpa had released) “any data on your testing revenue released in conjunction with your recent second-quarter results.”
I noted that I was specifically interested in testing revenue so far in Q3, cash burn so far Q3, expected testing revenue in Q3 and expected cash burn in Q3.
The company’s entire answer was “We have not provided this information.”
Put mildly, XpresSpa’s utter refusal to provide any data on its COVID-19 business does not bode well for the outlook of XSPA stock.
XpresSpa Will Face Even Tougher Competition
On Aug. 24, New York Governor Andrew Cuomo announced that the Port Authority and the state would, in the coming weeks, team up to provide free tests for the coronavirus at JFK and LaGuardia airports.
At first, I thought the news would be great for XSPA stock because I anticipated that Cuomo would make the testing mandatory for those arriving in the airports. At the very least, I thought he’d enable travelers whose test results are negative to avoid being bound by the state’s quarantine.
In either case, demand for testing would be so huge that supply would not be able to keep up, and XpresSpa would benefit from tremendous utilization of its testing facility at JFK, even though its tests are not free.
Satzman has said that people’s health insurance will pick up the cost of its tests, but most insurers require co-pays for tests that cost money. Consequently, XpresSpa’s tests will not be entirely free for most consumers.
But, according to The New York Daily News, the tests will not be mandatory. Further, the article did not mention anything about negative test results being used to avoid New York’s quarantine, and I was not able to find any information suggesting that will be the case.
Meanwhile, XSPA stock has tumbled 43% since its Aug. 25 peak. The company’s sale of new shares definitely contributed to that tumble.
But if the company was about to benefit from a huge demand surge in JFK, I don’t think that the shares would have dropped nearly as much as they have. Taken together, the data strongly indicates that Cuomo does not intend to allow negative test results to be used to override the quarantine.
In the past, I’ve noted that XpresSpa faces competition from free testing at hundreds of drug stores and other facilities throughout the U.S..
Now it’s facing competition from free tests at one of the two airports at which it has set up a testing facility. And since Newark, the other airport at which it has launched a facility, is also run by Port Authority, there’a good chance that that airport will also set up facilities which will provide free tests.
The last viable argument for XSPA stock — the enhanced convenience of its tests for travelers and airport employees versus drug stores located outside of airports — has been greatly undermined and is in danger of disappearing altogether, at least for the foreseeable future.
The Bottom Line on XSPA Stock
XpresSpa’s refusal to disclose any data about the performance of its testing business is extremely worrisome. Meanwhile, the company is about to face free competition in JFK without, apparently, any major increase in overall demand. As a result, the last remaining rationale for its testing business has been greatly undermined.
Given these points, I continue to recommend that investors sell XSPA stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
