An interesting thing happened to XpresSpa Group (NASDAQ:XSPA) stock in December. The company clearly tried to gin up investor enthusiasm toward its Covid-19 testing operations. It didn’t work.
Within the month, XpresSpa issued at least six press releases citing varying partnerships and moves underlying its testing business. Yet, for the month, XSPA stock dropped 27.4%.
As a result, the stock is back where it traded during the second half of May. The bad news, however, is that XSPA could be headed back to where it traded before that.
A Flurry of News
It seems likely that the same kind of news from XpresSpa a few months ago might have had a very different impact on XSPA stock.
After all, a massive rally last year was sparked by a press release. On May 22, XpresSpa announced it had signed a contract with New York’s John F. Kennedy International Airport for a pilot program providing Covid-19 tests.
Almost instantly, XSPA became one of the hottest “pandemic plays” around. The stock rose 70% on the news, and a few days later embarked on a four-session 187% rally. Shares that early in the year had traded for 15 cents briefly cleared $8.
The thrill seems to be gone, however. In early December, XpresSpa announced two new executives and the promotion of a third. A new location opened in Denver, and a new one picked up in Salt Lake City. Agreements were signed with major airlines.
Only one of those agreements did anything to move XSPA stock, which rallied sharply on Dec. 17. But a midday announcement of yet another share offering ended the rally, and the stock actually closed that day in the red.
Confidence Lost
The trading in December should matter not just to traders but also to investors. It’s a sign that the market simply doesn’t buy the XpresSpa story.
It’s not hard to see why. XpresSpa’s pivot from providing airport massages to Covid-19 testing made sense. It was basically the only thing the company could do. But that doesn’t mean airport testing is an attractive business, or that XSPA stock is attractive even at the current valuation.
After all, it remains unclear how much money XpresSpa can actually make. At-home and rapid tests will be available en masse this year. A vaccine should keep us all moving back on the road to normalcy.
In other words, there’s a short window in which XpresSpa’s testing subsidiary (known as XpresCheck) can make a profit. Yet the company is nowhere close to operating in the black. A handful of airports and a handful of routes don’t change that very real problem.
Now, investors potentially could argue that once the Covid-19 crisis begins to abate, XpresSpa can get back to its old model. The problem is that that model didn’t make any money, either. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $3.3 million in 2019 — worse than the year before.
And before XSPA stock became a Covid-19 play, investors didn’t think much of the spa business. XpressSpa had a market capitalization in the range of $12 million early last year. Pro forma for the recent stock offering, the company still has a market value of over $124 million.
Steer Clear of XSPA Stock
Obviously, that creates a huge problem for XSPA stock. There are only two ways to argue that the stock is undervalued at the moment.
First, an investor could believe that the market badly — and I mean badly — misvalued the legacy business before the pandemic. A business valued at less than $15 million actually now should be worth more than $100 million. Given lingering pressures on the travel industry, that case seems exceedingly difficult to make.
Or, the same investor could argue that XpresSpa actually will make significant profit from Covid-19 testing. After all, testing likely will be required for years to come. Once XpresCheck scales its business, profitability will follow.
That case doesn’t seem to hold much water, either. The company is working with only a handful of airports so far. Other airports may well partner with state and local authorities, bypassing the company completely. A $200 price tag for the rapid tests means travelers themselves will look for other options.
There’s just not that much here. And what recent trading shows is that investors finally have figured that out. A supposed plan to become the leader in airport Covid-19 testing was enough to drive XSPA stock higher in May and June. In January, with the end of the pandemic in sight, that’s no longer true.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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