Shares of rapidly expanding China retail coffee operator Luckin Coffee (NYSE:LK) started off 2020 red hot. In matter of less than three weeks, LK stock rose more than 25% from below $40 prices in late 2019, to above $50 prices in mid-January 2020.
Then, there was a coronavirus outbreak in Wuhan, China. Specifically, thousands of people across the globe (all of whom with a connection to Wuhan) have fallen ill to a new strain of coronavirus, dubbed 2019-nCoV, while a handful even died.
The outbreak, which bears rough similarities to the SARS coronavirus outbreak in south China in 2003, has put investors on edge. After all, the SARS outbreak had a significantly negative impact on Chinese economic activity for several months, so investors are nervous that the 2019-nCoV outbreak could play out in a similar fashion.
Consequently, all Chinese stocks have been in a big downtrend ever since this new coronavirus outbreak. That includes once red hot Luckin Coffee. Shares of LK have dropped more than 25% since the outbreak.
This sell-off is overdone. Things may look ugly right now, but in the big picture, 2019-nCoV is not the second coming of SARS, and it won’t have the same economic impact that SARS did. Any negative hit to Chinese consumers will be quick and short-lived. Importantly, it won’t be big enough to materially impact Luckin’s growth narrative.
As such, this scare will blow over. Luckin will proceed to report more blowout numbers throughout 2020. And, as they do, LK stock will roar back to $50.
The Wuhan Coronavirus Is not SARS
Although 2019-nCoV and SARS are both coronavirus strains that originated in China, often result in cold-like symptoms, and can result in death under some circumstances, the SARS outbreak in 2003 was far, far worse than the current Wuhan coronavirus outbreak.
The SARS outbreak infected far more people. Over 8,000 cases of SARS were reported in China in 2003. Less than 3,000 cases of the Wuhan coronavirus have been reported so far, and while that number is climbing, it’s unlikely to hit 8,000 at its current pace.
The Wuhan coronavirus is also far more contained, with five cases having been reported in the U.S. versus a suspected 115 U.S. cases for SARS. SARS had a far higher mortality rate of about 10%, versus under 3% for the Wuhan coronavirus. Of that 3%, the majority of deaths from 2019-nCoV have been among the elderly, many of whom were already sick and waited a long time to receive treatment.
Further, the SARS outbreak took far longer to identify, isolate, and contain. The first cases were reported in November 2002. Big organizations and governments didn’t start to respond adequately until about March 2003, giving the virus five months to evolve and spread without much intervention.
The first case of the Wuhan coronavirus was reported in December 2019. A month later, multiple cities across China have been put on lock-down, anyone with the virus outside of China has been put in isolation, and organizations like CDC and WHO are already fully involved and actively seeking a vaccine.
On that front, thanks to previous work done with the SARS vaccine, it appears quite likely that scientists will come up with a vaccine for the Wuhan coronavirus quickly.
Zooming out, then, the Wuhan coronavirus isn’t that big of a deal and hysteria surrounding the outbreak won’t last that long.
Luckin Coffee Stock Will Bounce Back
Luckin Coffee stock is acting like Chinese consumers everywhere are going to stop buying coffee for a long time because of this coronavirus.
That won’t happen. Even the nasty, very lethal, and very widespread SARS outbreak didn’t hit consumers that hard. Retail sales growth in China in the back half of 2002 averaged about 9.5%.
In the first half of 2003 in the wake of the SARS outbreak, retail sales growth slowed to an average pace of roughly 7.5% (and hit a low of 3.4% in June 2003). That’s a slowdown, but only about a 20% slowdown. Further, by August 2003, retail sales growth rates rebounded back towards the 10% level.
The much less nasty, far less lethal, and far more contained Wuhan coronavirus outbreak will have an even smaller impact on retail sales growth in China. At this point, I think the most likely outcome here is something like a 10% slowdown in consumer activity across China for one to two months, at most.
That’s not that much of a slowdown. It’s certainly not enough of a slowdown to significantly impact the long term Luckin Coffee growth narrative.
That long term growth narrative, according to my numbers, supports LK stock at a $50 price tag by the end of 2020.
Given that, here’s how I think things will play out with LK stock. Coronavirus concerns will stick around for the next few weeks. Those concerns will continue to weigh on LK stock, probably dragging it down towards the $35 level. By mid-to-late February, those concerns will largely fade, as the virus stops spreading and headway is made on a vaccine.
As they fade, LK stock will start bouncing back. It will keep bouncing back throughout the year as the company reports robust growth quarter after robust growth quarter.
By the end of the year, LK stock will be back up at $50.
Bottom Line on LK Stock
Coronavirus concerns are very real. But, they are also overstated. As such, the weakness these concerns are creating in Chinese stocks is overdone, too.
One of the best Chinese stocks to buy on the coronavirus dip is LK stock. Luckin Coffee is supported by one the best growth narratives in the market. Any temporary slowdown in Chinese consumer activity will not materially impact the company’s growth narrative enough to warrant the stock’s 25% drop over the past few days.
Exercise patience will buying this dip. Coronavirus concerns won’t disappear overnight. Neither will weakness in LK stock. But, in the long run, shares will rebound in a big way from this dip.
As of this writing, Luke Lango was long LK.
