At first glance, XpresSpa Group (NASDAQ:XSPA) may seem like an interesting way to speculate in Covid-19 stocks. But the XSPA stock chart is telling a story, and it’s not one that speculators are going to like.
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On March 19, 2020 XSPA shares were trading at 37 cents a share. To chief executive officer (CEO) Doug Satzman’s credit, he made a strategic pivot. Revenue for his core business model relies on having airport traffic. And those passengers weren’t going anywhere near an airport. And let’s face it, even if they do fly, are they going to get a massage or a pedicure?
So Satzman saw an opportunity to use its existing space in airports to get into the business of Covid-19 testing. This was despite the fact that Satzman had no experience in that area. But let’s put that aside for a second.
On June 5, XSPA stock popped to over $7 per share. This was largely on news that the company was going to begin testing in New York’s John F. Kennedy airport on June 23.
Yet as of this writing, the stock has fallen more than 60% including approximately 30% since July 9. I suspect that’s because investors are starting to look at XSPA stock with a wider lens. And as they do, the story is of not one, but two, business models that have a challenging path to growth and profit.
The Company’s Core Business Has an Uphill Climb to Profitability
Although he feels XpresSpa has a compelling business, in my opinion, Will Ashworth unintentionally described the problem facing the company’s core business model. In order to become profitable, XpresSpa needs to increase revenue. And not just a little, a lot. Here’s the problem. Revenue was flat from 2017 through 2019. And this was during a period that we may look back on as the golden age of aviation.
And now, at least one airline suggests that airline travel may not return to pre-pandemic level for two years. So even if there is a Covid-19 vaccine by the end of the year, airport traffic won’t approach normal levels. That means that, using its core business model, XPresSpa will continue to be unprofitable.
The New Business Model Has a Built-In Contradiction
Now, let’s look at the Covid-19 testing business. Larry Ramer wrote about the difficulties that XpresSpa faces to build the trust and the business of its target audience. You should read the whole article, but this is a good summation:
XpresSpa has entered a complicated field in which it has no experience and no competitive advantages. Making matters much worse, it entered the field very late and is trying to compete against companies and government agencies that are literally giving away the service.
But let’s say that it does start generating revenue. The model fundamentally relies on there not being a safe and effective vaccine for the novel coronavirus. Because if the majority of passengers are vaccinated at some point in 2021 where does demand go?
However if there is no vaccine there won’t be passenger travel and therefore reduced staffing. So where does demand go in that model? Before you answer that, keep in mind that the company has only rolled out testing at one airport so far. And by Satzman’s own admission, expanding this model in other cities and states has challenges that its core spa businesses do not.
The bottom line is that it’s hard to imagine this business model generating significant revenue, or turning a profit, anytime soon.
What’s Next For XSPA Stock?
The company was not profitable with its current business model prior to the pandemic. Now it’s invested in a separate business model that is fundamentally incompatible with its initial model. No matter how this plays out, the company still seems to face a daunting path to the kind of growth that supports speculation in XpresSpa stock.
XpresSpa was a penny stock when the year started. And when you look at the XpresSpa chart over the last five years, its current price is only surprising in that it’s likely too high. Its core business is proven but has no demand. The business it’s trying to pivot to has potential, but still no proven demand.
No matter how you look at it, XSPA stock needs to prove that it has a business that can grow before I would consider investing in it.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.