In the roughly 24-month period leading up to their all-time high in December 2014, shares of Spirit Airlines(NYSE: SAVE) skyrocketed 400%. But it's been a turbulent journey since then, with the stock plunging 96% from that peak price.
Even this year, the airline stock is down a gut-wrenching 78%. That's truly disappointing considering that the broader market is in record territory.
Can Spirit Airlines stock, which sells for $3.66 (as of June 28), rise 173% to reach $10 by 2030? For what it's worth, shares were at that level as recently as January.
Spirit's troubles are hard to overlook
One big reason the stock has nosedived in 2024 was because the proposed merger with JetBlue fell through after regulators blocked the deal from happening. Shareholders were looking forward to the creation of a more powerful budget airline. With no suitor anymore, Spirit's troubling financial situation is now fully in the spotlight.
The first problem is the simple fact that this business has been struggling for a while to post positive earnings. In 2020, 2021, 2022, and 2023, Spirit reported huge operating losses. And during the first three months of this year, the operating loss totaled $207 million. It's anyone's guess when -- or if -- Spirit can reverse this worrisome trend.
Adding to its financial woes is Spirit's alarming balance sheet. At the end of Q1, the company carried a massive debt load of $3.3 billion. That's a much higher balance than its cash and cash equivalents of $765 million. And even more striking, Spirit's debt burden is an eye-popping 750% larger than its current market cap of $388 million. Unless the business can get to profitability sooner rather than later, it could run out of money.
Spirit's challenges stand out when compared to the "big four" U.S. airlines. Delta, Southwest, American, and United all reported positive sales growth in their most recent quarters. Moreover, they were all profitable in 2023.
Meanwhile, Spirit posted a revenue decline of 6.2% in Q1, marking its third straight quarterly drop. And executives believe the company's sales will fall 7.2% in the current quarter (at the midpoint), continuing the disappointing streak. Matt Klein, Spirit's chief commercial officer, blamed the industry's capacity growth, which is making it difficult to drive demand.
In order to try and stabilize the business, the management team is making cost cuts. And there are ongoing discussions happening with creditors. The hope is that Spirit can renegotiate some of its debt so that it can find some breathing room and create some near-term relief.
Investors should temper expectations
I think investors should seriously be questioning whether this is a smart stock to buy at all, given the company's monumental struggles. Revenue is falling, operating losses are sizable, and the debt is worrisome. It's hard to have any bit of optimism as we look to the future.
But the stock is dirt cheap right now. It trades a price-to-sales ratio of just 0.076. This is close to the cheapest shares have ever been. It appears as though the pessimism has never been higher.
Based purely on a valuation perspective, some investors might want to take a chance on the stock. However, I believe Spirit is a value trap. Its financials are trending in the wrong direction, with no end in sight. And I think the business lacks any competitive advantages. This makes it a terrible investment candidate, in my opinion.
For the stock to reach $10 by 2030, it would need to rise 173%. This theoretical gain, which translates into about 18% per year, would most likely beat the S&P 500's return during that time frame. But that lofty target is a pipe dream. Spirit shares are poised to keep disappointing investors for the foreseeable future.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
