Can XpresSpa Group (XSPA) Buck The Market Trend?

By Ben Rabizadeh Founder of Story, Inc. DBA StoryTrading

• New COVID variant, Omicron, shines a light on this former COVID play
• Q3 earnings flipped to profitability with strong balance sheet
• “Stacked catalysts” may provide synergistic impact on price action
• Recent break of 200 DMA provides for a rare strong chart amidst the market turmoil

StoryTrading recently revealed XpresSpaGroup XSPA as it’s latest VIP Pick. This pick was presented by our founder, Ben Rabizadeh, due to what he views as positive indicators of all four StoryTrading pillars of Fundamentals, Catalysts, Sentiment, and Technicals. When evaluating a stock holistically in this way, StoryTraders seek to identify inflection points in stock prices in an effort to outperform markets.

Overview

XpresSpa, contrary to its name, is not just a spa service. While spas were the company’s primary business in 2019, that business was completely decimated when COVID hit, taking the stock down to a split-adjusted $0.15 low before management engineered a complete transformation of the company. In coordinating this turn-around, management determined they could take advantage of their valuable and difficult to obtain airport leased locations to join in the public health battle against COVID-19.

In transforming the company, XpresSpa created an umbrella entity, XpresSpa Group, with three brands underneath it:

1. The legacy XpresSpa business under its original name

2. XpresCheck for COVID-19 testing at airports

3. TREAT, a travel health and wellness app and subscription service

The company plans to, and already has begun re-opening some of its legacy XpresSpa locations, but the main source of business right now is COVID-19 testing via its XpresCheck brand. The TREAT brand is a key component of its transformation as it seeks to look past the transitory nature of COVID-19 testing and ensure recurring revenue is won for the long-term.

With this understanding of the products and services, attention is turned to StoryTrading’s four pillars of Fundamentals, Catalysts, Sentiment, and Technicals. All price action is determined by a combination of these four factors and understanding it can empower better decision making and help to identify inflection points in stocks.

Fundamentals

In Q3 2021 which was just reported on November 15th, driven by the transformation of their business to COVID testing, XSPA flipped to profitability for the first time in its history. Revenue jumped 6000% year over year to $26.8M, income from operations flipped to positive $7.1M, and net income was $5.6M. This represents $0.05 per share in EPS and an annualized PE of just 5 when you exclude the large net cash position.  Additionally, the company is guiding for continued growth, targeting $500 million in annual revenue by 2025. In Q3, Xprescheck contributed $25.4 million in revenue, Xspa contributed $1.4 million, and TREAT, having just recently launched, did not contribute to the topline number. Below is the company’s official guidance which can be found on their website here.

In addition to the $25.4M of COVID testing revenue, XSPA has some optionality upside due to it’s $2M pilot program with the CDC for biosurveillance tracking. This pilot program involves pooling testing from a group of participants to identify if anyone in the group may be positive for COVID. If the test is positive, participants are then suggested to get individual COVID tests.

This program started in Q4 at three airports for flights incoming from India. On the Q3 call, management stated 75% of this $2M contract will be recognized in Q4. It was anticipated that this program would be expanded in 2022, but it was expanded early and unexpectedly due to the recent emergence of the Omicron variant (see catalysts section below for more details).

Significantly, in the third quarter, due to it’s strong balance sheet, XSPA repurchased 250,000 shares, with authorization for up to another 14.75 million shares - a significant amount, given the float of 105 million shares. On the Q3 conference call, management said that they believe shares are undervalued and that the pace of buybacks will accelerate in the future. Due to the offering in December of 2020, the company now has a $109 million cash balance, and a market cap of just $196 million as of December 9th, 2021. It’s noteworthy to mention that as of the most recent financial statement, about 14 million warrants remain at a strike price of $1.70 which could weigh on the stock depending on the intent institutions have for those warrants. 

Aside from the annualized PE of 5, valuation can be assessed by other means. The below chart shows the relationship between cash and enterprise value (EV). Due to the high cash position, the XSPA market cap over-states the company’s value. In cases like this, it’s helpful to look at the enterprise value which excludes the company's net cash position. The EV for XSPA is just 109M compared to it’s market cap of 196M. It’s helpful to remember this when calculating valuation multiples.

In this below chart, it can be seen that the EV to revenue ratio is at a relative low despite the business being in a much stronger position.This may give an indication of where the future share price is going if the market determines that XSPA deserves a higher ratio.

Add it all up and what do you get? Our founder, on December 2nd, live on Benzinga, referred to the below chart as the "Mic drop" moment.


Apparently institutions have become so convinced of this fundamental turn-around story, that they are both covering their short positions and going long at the same time over the past several months. The visuals of this chart tell a compelling story. It's rare to see such a strong signal on a chart - especially for a company with a very long history of price declines. Many retail investors have left this company for dead, but institutions apparently like what they see.

Catalysts

In addition to mic drops, we got pancakes! In the recent Benzinga presentation, our founder referred to XSPA catalysts as “stacked like pancakes”. Stacked catalysts can create a synergistic effect in price action helping to spark strong short-term moves.

The following is a brief overview of the catalysts that have already taken place: 

• November 15th - Earning blowout best quarter ever recorded in company history
• November 17th - HC Wainwright & Co. raises price target to 4$ with a buy rating
• November 26th - Omicron variant emerges in South Africa triggering worldwide concerns
• November 30th - CDC expands pilot program to track Omicron variant adding another major airport (Atlanta) and additional countries
• News Coverage including CNN, CNBC, Fox Business and many more

Looking forward, there are a few potential catalysts which may help drive the stock higher in the future, which could include:

• The announcement of stricter testing requirements for international travel
• Domestic testing requirements
• The anticipation of a blowout quarter in Q4
• The actual Q4 results
• More news coverage of the spread of Omicron
• The possible emergence of additional COVID variants

In addition, management made a special remark about future acquisitions:

As XpresSpa Group looks to the future in combination with our strong liquidity position and interest in growth, we are also considering accretive acquisitions and other strategic transactions to further broaden our service in retail offerings and would invest in new opportunities beyond this new evolving concept.

Management also spoke about the upcoming rollout of TREAT, which is planned for December 2021:

We see a clear need and want that can be filled in the travel in a post-pandemic world. As we previously disclosed, we launched treat.com website on June 1st, 2021. The Treat mobile app was then launched on August 16th, 2021. We have offered select premium memberships for targeted customers as we launched the initial app. With Treat membership, customers will receive 1 free annual rapid PCR test, valued at $250, an annual flu-vaccine, and unlimited on-demand virtual care to name a few of the benefits. We expect to launch Phase III in December, when we open our first, in-airport wellness center in JFK Terminal 4, followed by Phoenix Sky Harbor Airport in the first quarter of next year.

Sentiment

While the sentiment for XSPA has improved due to all of the recent developments, the big question is how sustainable is the business? Omicron clearly increased sentiment about the long-term sustainability of the business but bears will always wonder which variant will be the last. This is a key risk to consider.

For now, each new variant increases the perception that COVID is here to stay and due to lock-down fatigue, instead of restricting travel, the solution will be more testing.

XSPA is aware of the sustainability issue, which is why they are focusing on converting their customer base to the new recurring revenue TREAT service. The TREAT app is a digital health app which provides telehealth, digital health passports, flu vaccines, and COVID vaccines. This long-term thinking is likely a major factor in the recent institutional purchase and short covering. Institutions care about sentiment too! And they certainly wouldn’t be buying XSPA if they didn’t have a long-term plan to address the concern of sustainability.

As noted above, the one and possibly only negative sentiment issue weighing on XSPA is the prospect that the latest variant is the last. Recent reports suggest Omicron may not be as  dangerous as first feared and there is some speculation that it could help accelerate worldwide natural immunity and bring on the end of COVID. Most of the valuation multiple awarded to XSPA is solely determined by the sentiment of business sustainability and as such, price action may be dramatically impacted by news events related to Omicron developments.
On the positive side, the CDC deal, if expanded to a full national roll-out, can be a huge boon for the company. The CEO, Doug Satzman, in multiple recent interviews has hinted to the potential size of such a deal and indicated the company is ready to deliver.
Add it all up, and net net, sentiment is very high for XSPA right now.

Technicals

The technicals for XSPA were very favorable on Black Friday, when XSPA was first discovered by the StoryTrading community. On that day, as can be seen below in the chart, XSPA broke the 200 DMA, a very important technical indicator for long-term direction changes in stock prices. Two additional catalysts are annotated on the chart which tells the story of the price action. Technically, there have been two additional milestones. A 20/50 bullish cross and a 20/200 bullish cross on the simple daily moving averages. That’s the blue line (20 SMA) crossing over the red and white lines.

But what comes next? StoryTrading consults with a technical expert, Rexman, to identify resistance levels and bull targets. In his below chart, Rex explains the next two major resistance levels are $2 and then $3. If the stock closes above $2, it has a good chance of working it’s way to $3. If it breaks $3, then it has a chance of a “mini-supernova” and a rapid rise to the $6/$7 area. You can find Rexman on Twitter here.

Summary

StoryTrading empowers individuals to make the best informed trade and investment decisions through a holistic view of stocks based on the four pillars of Fundamentals, Catalysts, Sentiment, and Technicals. Analyzing all four pillars together can also help to identify key inflection points.

Fundamentally, financials seem to have turned. XSPA recently flipped to profitability and if you annualize the most recent figures, it's trading at a PE of 5 based on it’s EV. In addition, the company is executing share buybacks with their $100M cash balance. Catalysts are "stacked like pancakes" with the recent CDC pilot program expansion and prospects of additional catalysts in the near-term. Sentiment is positive but is fluid, depending on the severity of the Omicron variant, but management has executed a turn-around and has a plan for sustainable growth which has overall improved sentiment since the Q3 report. It’s no wonder institutions have been covering their short position and buying the stock. Add that all up and it reflects in the technicals which broke the 200 DMA and has significant upside potential if the $2 and $3 levels break.

So will XSPA continue to buck the market trend? That's for you and the rest of the market to determine. We'll be here to tell the story as events unfold!