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For Risk-Tolerant Growth Investors, Luckin Coffee Stock Is Worth a Shot

One of the nifty things about the evolution of the Chinese economy  is that over the years the country has become home to an increasing number of companies that are home-grown equivalents to famous American firms.

Here's Why Luckin Coffee Stock is a Great Growth Stock to Buy Now

Source: Keitma / Shutterstock.com

These days, Alibaba (NYSE:BABA) draws plenty of comparisons to Amazon (NASDAQ:AMZN) and before that, it was Baidu (NASDAQ:BIDU) being called the “Google of China.” Now investors can access the Starbucks (NASDAQ:SBUX) of China, Luckin Coffee (NASDAQ:LK).

Luckin deserves some credit for multiple reasons, not the least of which is that Luckin stock went public in the U.S. in May and has since soared about 85%. China’s second-largest coffeehouse operator isn’t saying it, but I’ll say it: eat your heart out Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and other money-losing American unicorns that went public this year!  Luckin stock is wiping the floor with you.

Then there’s the specter of Starbucks, itself an impressive performer in 2019. The world’s largest coffeehouse operator has a significant China footprint and stellar global brand recognition. That makes the fact that LK stock has almost doubled in the current quarter all the more astounding. It also means that if Luckin wants to cement its status as the Starbucks of China, it’s going to have tussle with, well, Starbucks.

Room for Growth

As a newly public, consumer-related company operating in an emerging market, Luckin is very much a growth stock. However, that’s what the Chinese coffee industry is as well: a growth story. Remember, when it comes to warm beverages, the Chinese tradition is rooted in tea, not java.

On a per capita basis, the Chinese have a long way to go to catch up with Americans and Brits when it comes to coffee consumption. The average Chinese person drinks just three cups of joe per year compared with 250 cups in the U.K. and 363 cups in the U.S., according to data from the International Coffee Organization.

That’s because coffee is a relatively new phenomenon in China, meaning that coffee consumption and Luckin stock could have a lot of room for growth.

“China’s tea-centric culture was relatively untouched by Western coffee retailers until the late 1990s, when Starbucks first entered the Chinese market. Given China’s huge population, coffee companies have found a market in China that they hope to develop,” according to a study by the University of Southern California (USC). “More importantly, the emergence of coffee in China represents the new dominance of a previously uniquely Western influence, and coffee itself serves as an exhibition of social status and cosmopolitanism.”

Consider the following about the rapid evolution of the Chinese coffee market: As USC pointed out, the first brick-and-mortar Starbucks opened there in 1999, followed by  the first Dunkin’ Brands (NASDAQ:DNKN) store in 2008. It wasn’t until early 2018 that Luckin opened its first store, but by the middle of the year, it was a unicorn, a la Lyft and Uber.

The Bottom Line on Luckin Stock

Today Luckin has nearly 4,900 stores in its home country, or about 600 more than rival Starbucks. Further, the Chinese company is adding locations at a far more rapid rate than its American counterpart.

That’s another statistic that confirms Luckin’s growth outlook. Here’s one more: much like its American unicorn brethren, Luckin isn’t yet profitable and it could be late 2021 by the time it’s in the black.

Additionally, a curveball could be thrown at Luckin investors if China’s economic growth dips below 6% next year. That would be the first time in 30 years that has happened, and it would likely sting Chinese consumer stocks.

And for the privilege of all those potential risks, investors embracing Luckin stock will pay nearly 17.5 times analysts’ average sales estimate, more than quadruple Starbucks’ price-sales ratio.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/luckin-stock-isnt-cheap-but-coffee-is-booming-in-china/.

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