easyJet’s (LSE: EZJ) share price has taken a huge hit recently. There are two main reasons why. Firstly, uncertainty over the Delta variant of the coronavirus has scared investors out of the travel sector. Secondly, easyJet has announced that it’ll issue new shares (at a significant discount to the recent share price) in a £1.2bn rights issue.
Big share price falls can sometimes create amazing opportunities for long-term investors. But are easyJet shares a good investment for me from here? Let’s take a look.
Should I buy easyJet shares today?
When I last covered easyJet in April, I said I wasn’t interested in buying the shares. My view was that there were better ‘reopening stocks’ to buy (like Alphabet, which is up about 30% since that article).
Today, my view on easyJet shares is exactly the same as it was back then. I just don’t think EZJ offers a good risk/reward proposition for investors like myself.
In the short term, it looks like the travel industry may not rebound in the way people thought it would earlier in the year. Covid-19 doesn’t appear to be going away any time soon and this means we could be in for several years of disruption. This is going to create huge challenges for the travel industry.
Last week, US airlines – which have enjoyed strong domestic conditions recently – warned that revenue in the near term is going to be well down, due to the Delta variant. For a company like easyJet, the outlook could be even worse. That’s because it can’t profit from a booming domestic travel industry like the US airlines can.
It’s worth pointing out that, as a result of Covid-19, the cost of travelling overseas has skyrocketed due to the fact it’s often compulsory to take a related test before flying. This could also hurt easyJet’s near-term revenues. Some people may simply decide that the costs of an international trip in the current environment are too high.
‘A machine for losing money’
Looking to the long term, the prospects for the travel industry do look better. In the long run, the industry should benefit from increased spending power, an ageing population that loves to travel, and advances in booking/payments technology.
I wouldn’t buy an airline stock such as easyJet to capitalise on the growth of the travel industry though. As Fundsmith portfolio manager Terry Smith says, airlines are a “machine for losing money.”
There’s so much that can go wrong and, as a result, airline stocks tend to be terrible long-term investments.
easyJet’s share price could rebound
Of course, there’s always the chance that easyJet’s share price could rebound from here. A bit of positive news in relation to Covid and/or the European travel industry could see the stock jump. The share price could also rise if the company receives another takeover offer.
However, I won’t be buying easyJet shares for my own portfolio. In my view, there are much better investment opportunities right now for long-term investors like myself.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Alphabet (C shares) and has a position in Fundsmith. The Motley Fool UK owns shares of and has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.