After selling off in the past few months, is it time for XpresSpa (NASDAQ:XSPA) stock to make a comeback?
XpresSpa stock soared after its move into the airport testing business on the heels of the novel coronavirus. But, despite taking the old adage, “when life gives you lemons, you make lemonade,” and running with it, this early summer rally quickly turned into a late summer/early fall sell-off.
Soaring from pennies to prices as high as $8.82 per share, shares have cratered to around $2 per share. Holding steady, all bets are off whether the stock bounces back or falls further.
Why? On one hand, a change in how policymakers handle the virus could be a massive tailwind for its nascent testing business. Also, its move to offering testing for other communicable diseases may turn this into a long-term business line for the company.
On the other hand, those making a bull case could be grasping for straws. There’s no guarantee we will see an environment where the pandemic is still a threat, but airline traffic gets back to even 50% of pre-pandemic levels. Coupled with the company’s continued red flags, shares could continue falling back towards $1 per share and below.
So, what’s the call here? With risk/return out of your favor on both the long and short side, your best move to stay on the sidelines.
How XpresSpa Could Bounce Back to Prior Highs
While the stock has taken a beating in the past three months, the company is moving along with its shift to testing services. As our own William White reported Oct. 6, XpresSpa announced the opening of its first two Covid-19 testing centers.
Both locations are at some of the New York metropolitan area’s busiest airports (JFK and Newark Liberty). Success at these locations will show whether testing services can move the needle or not.
Yet, success at these two airports isn’t enough to justify the stock’s current market capitalization ($134.8 million), much less another epic move back to its prior highs. But, as it seems we will have to weather the pandemic well into next year (and perhaps longer), shares still have a pathway to head higher.
How so? First, as InvestorPlace’s Josh Enomoto discussed Oct. 27, we could see Covid-19 policy shift from avoidance to management of its threat. In other words, instead of social distancing restrictions (which minimize air travel capacity), implementing mandatory testing of passengers, and refusing entry for those with the virus, may be the best way to handle the virus, without further crippling hard-hit industries like aviation.
Second, the company’s move to offering testing for other major communicable diseases (like the flu) could parlay its pivot to testing into a long-term business. Granted, demand for normal flu testing pales in comparison to Covid-19 testing demand. Yet, health services may be a more profitable business to pursue than its former business (spa services).
In short, there’s a bull case to be made, even if the stock looks frothy at first glance. But, that being said, be aware of the many red flags surrounding this stock.
Shares Could Fall, But Don’t Go Short
Back in July, when shares were still flying high, I highlighted several concerns with buying XpresSpa stock. First, the company’s history of entering new businesses in order to gin up investor interest. Investors who bought into this prior hype have lost big. Shares have fallen about 99% in the past five years.
Second, the company’s history of dilutive stock offerings. Since publication of my prior XpresSpa article, the company raised $35.3 million via a direct offering. Did it raise this money to bankroll its testing center pivot? Or is XpresSpa cynically cashing in on the crisis, raising money to keep the lights on?
Yet, despite these warning signs, don’t consider this a great stock to short at today’s prices. With Covid-19 cases rising, speculation in pandemic stocks could return once again. And while short interest right now isn’t terribly high (8.2% of float is currently sold short), those betting against the stock at today’s prices could still get squeezed.
The Bottom Line on XpresSpa Stock
After selling off since June, can this stock mount a bounce back to prior price levels? It all depends on how Covid-19 plays out in the coming months. Sure, a surge in new cases means we could be dealing with the virus well into 2021.
But, barring the major shift in policy highlighted above, it’s debatable whether this will help the company’s move into testing services pay off for investors. Yet, for those looking to go short, risk/return is out of your favor.
In short, as uncertainty continues for this speculative pandemic play, your best move is to avoid XpresSpa stock entirely.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.