Editor’s note: This column is part of our Best Stocks for 2020 contest. Larry Ramer’s pick for the contest is Luckin Coffee (NASDAQ:LK).
China-based coffee shop Luckin Coffee (NASDAQ:LK) is the best stock for 2020 because it’s very well-positioned to exploit several huge opportunities. Plus, its results are strong and its market capitalization is still quite reasonable.
Luckin said in November 2019 that it would have the most coffee shops in China by the end of 2019. And Chinese citizens are quickly becoming enthralled with coffee. In May 2019, NPR reported that the country’s coffee market was worth $10 billion and would jump to $43 billion in 2020. That’s truly explosive growth.
Meanwhile, Luckin’s coffee is meaningfully cheaper than the offerings of Starbucks (NASDAQ:SBUX), which had 3,600 stores in China as of May. Luckin’s coffee costs about $2.50 with a typical discount. Starbucks’ “average cup” of joe sets back its customers $4.80 per cup.
Luckin’s stores tend to be located in office buildings, and it delivers a great deal of its coffee, making it very convenient. The company also requires consumers to order and pay through its app. This means it collects data on all of its customers. Of course, it can use that data to effectively market its products to its customers down the road. That marketing edge is positive for Luckin and for LK stock.
Tea and International Opportunities
China’s tea shops are actually still way more popular than its coffee shops, although coffee shops are catching up. In 2018, the country’s coffee shops generated $4.3 billion of revenue. That number is expected to increase at an annual rate of 15%-20% through 2025. China’s tea shops generated revenue of $7 billion in 2018, and their sales will increase at a compound annual growth rate of 3% from 2019 to 2023.
So Luckin’s decision to begin selling tea beverages in April, and its launch of tea shops under a separate brand in September, has enabled it to tap into a larger market. That larger market is also still growing.
Indeed, during its third-quarter earnings conference call, Luckin revealed that sales of its tea had soared an incredible 800% in five months. The company’s decision to enter the tea business has already been positive for Luckin’s results and for LK stock. And that trend should continue.
Furthermore, Luckin Coffee has added more food products and juice. Its revenue from non-coffee products jumped to 45% last quarter, from 31% during the same period a year earlier. The company said that its expansion into new products will boost its profitability and customer retention rates.
Similarly, Luckin’s deal with international food company Americana Group to sell coffee in the Middle East and India should tremendously boost financial results. The Chinese company’s deal with Americana, which is a franchisee for KFC and Pizza Hut, also provides tremendous validation of the quality of Luckin’s coffee.
Finally, Luckin revealed during its call that it’s in talks to set up joint ventures that would expand its successful business model to markets outside of China. Of course, if the company is able to set up profitable coffee shops in other markets, Luckin stock would surge tremendously.
Luckin’s Q3 Results
Luckin’s Q3 results truly look great and indicate that the outlook of Luckin stock is extremely positive. LK’s cumulative number of transacting customers jumped to over 30.7 million from over 22.7 million in Q2. Its average number of items sold per month surged to 44.2 million in Q3 from 27.6 million in Q2.
Its average total net revenues from products per store jumped 79.5% year-over-year to $62,900, and its store-level operating profit came in at $26.1 million. During the same period a year earlier, that figure was a per-store loss of $18 million. Importantly, its average number of monthly items sold per transacting company rose 6% versus Q2 and 15% year-over-year. This indicates that its customers are becoming more loyal. The company’s overall top line soared 540% year-over-year to $216 million.
Its non-GAAP operating loss was $77 million, up from $69 million during the same period a year earlier. But there are multiple indications that the company will soon be profitable. Its stores are now profitable, indicating that, as it continues to add more stores, its bottom line will rise. Furthermore, the company’s net loss was 31.9% of its revenue in Q3, versus 201% of its revenue in the same period a year earlier.
Finally, Luckin stated that its marketing costs will drop in Q4 versus Q3. Now that Luckin has become much more well known in China, it’s logical that marketing costs will decline.
Best Stocks for 2020: LK Stock Is Incredibly Attractive
Despite the recent, tremendous rally of Luckin stock, LK still has a market cap of only $7.1 billion. That’s very low for a company that looks set to be extremely successful in the world’s second-largest economy. By contrast, the market cap of Starbucks is $104.9 billion, while Chipotle (NYSE:CMG) has a market cap of $23 billion. LK could easily become at least as successful.
Luckin’s rapidly rising revenue and profitability, along with the quality of its offerings, makes it an attractive stock. Add in its huge growth opportunities and its reasonable market cap, and Luckin stock becomes the best stock for 2020.
As of this writing, Larry Ramer owned shares of Luckin stock.