Why Luckin Coffee Stock Will Brew Into Long-Term Profits

It will take time and patience, but Luckin still shows great long-term promise

For many years Starbucks (NASDAQ:SBUX) was the king of coffee stocks. But last May, Luckin Coffee (NASDAQ:LK) sprang onto the scene with a bang. After a few days of stumbling, LK stock soared. It is now up 270% from the lows and up 140% from its debut. So clearly, Wall Street sees something it likes in it. Yesterday it fell almost 5%, but that was not specific to its own operation. All Chinese equities were rattled by headlines from the Coronavirus.

LK Stock: Don't Worry, Luckin Coffee Will Brew Into Long-Term Profits
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The fact that Luckin Coffee is already a competitor to Starbucks in three years of operation is testament to the bullish thesis it is enjoying. But for investors the matter of timing is always the issue when looking to buy a stock.

Currently, markets are at all-time highs and the company is also setting records. My instincts suggest that there might be better entry points than at these levels. Case in point is the 5% drop in mere hours and out of the blue. This is where investor time frames become an integral part of the decision to buy or wait

Look for LK Stock to Brew Long-Term Profits

Luckin operates in China, which is a potentially massive market for the chain. Starbucks has been after it for a while, but Luckin has the inside track with the home field advantage. It can play the long game there, so investors can do that as well. Meaning those who believe in the concept should just buy it now and forget about waiting for the perfect entry point.

The margins are sub-optimal now, but at this stage of the game, it is not as important to focus on the bottom line for as long as the company delivers the growth. Yes, this stock is risky but that doesn’t mean it is not a worthy investment. Most portfolios need a few speculative bets as they usually make for big home runs. Since they are bets, it is not advisable to have too many of them in one’s basket of assets. But a few positions in diversified areas could yield excellent overall results. LK is one of those opportunities that looks promising.

The Stock Is Not Cheap, But It Works

The stock is not cheap since it sells at 24 times its sales. But management has shown it is not afraid to make bold moves. Recently they announced launching dispensing machines, so they are focused on increasing the top line. This means that they want to eventually grow into their valuation.

In this case, they are literally setting points of sale to help in that effort. While there are concerns that the vending machines may cannibalize traffic from their stores which could impact the average ticket prices. Every customer that opts to use a self-serve kiosk becomes a lost opportunity for an up-sell from store visuals and sales people efforts. Only time will tell on that front, but for now ubiquity sounds like a good idea.

Source: Charts by TradingView

Despite the short-term challenges, the concept of profitable coffee venture is proven, even from the success of other eateries that are now famous for their coffee like McDonald’s (NYSE:MCD) for example. We are addicted to caffeine and the experience around it. People generally enjoy the routine of visiting their favorite shop or barista. So it is not likely that the market for coffee suffers from sustained recessions. That means Luckin has a long runway ahead of it.

Short term there are important price levels to note. It has recently rallied fast and far and that usually leaves it vulnerable to corrections. Prior breakout necklines become areas of potential support.

For LK stock there are nodes around $45, $40 and $36. For those going long in the stock, I would caution against averaging down too quickly. Luckin is still unproven long term, so patience is key. Besides, this is a speculative bet, so it should be left alone until close to the final verdict years down the line.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/luckin-coffee-lk-stock-brew-long-term-profits/.

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