The coronavirus outbreak that started in China and may now be spreading to the United States is tragic and frightening. It also was the chief catalyst behind the near one-point slide in the S&P 500 since Friday. That’s nothing, however, compared to Friday’s 8.6% decline in Luckin Coffee (NASDAQ:LK) stock. China’s coffee giant is continuing to fall today, down 6.3% in intra-day trading.
Investors in Luckin Coffee, which is often viewed as the Chinese challenger to Starbucks (NASDAQ:SBUX), can afford some retracement after the share price’s incredible fourth-quarter run-up.
Still, some shareholders remain concerned that fear will beget more fear, leading to further declines ahead. Will their worries prove to be justified, or unfounded?
An International Concern
What started as seemingly a contained, localized development has evidently metastasized into a much wider concern. As of this writing, the coronavirus death toll reportedly has surpassed 80 while over 2,800 people worldwide have been sickened. A number of major cities are in quarantine, and some Chinese localities are cancelling events surrounding the Lunar New Year.
Market traders seem hellbent on punishing LK stock in particular. And this slide seems to have coincided with the unfolding of coronavirus news. For comparison, note that Luckin shares were trading above $51 on Jan. 17. On the other hand, they were hovering around the $19 level as recently as November.
I find it fascinating that of all things, a coffee company should track the developments of the Chinese coronavirus so closely. Luckin was down 4.7% on Tuesday, down another 8.2% on Wednesday and up 2.1% on Thursday as containment hopes emerged. Now it’s falling again. When and where will it stop?
There’s No Need to Panic
While the spreading virus is extremely unfortunate, investors shouldn’t expect Luckin to be the market’s whipping boy for too much longer. Rather than obsess over headlines, I prefer to examine the company’s business model. With Luckin’s third-quarter revenues coming in strong at 1.6 billion yuan and beating analyst estimates by 4.7%, I continue to view the company as highly promising.
Moreover, I’m impressed with Luckin’s venture into what industry insiders call the “unmanned retail market.” The coffee company is rolling out vending machines, which tout fewer rental and payroll costs. They are also potentially very lucrative, as they offer coffee fast and conveniently. These to-go stations have kept me bullish.
Luckin is capitalizing on this trend with its launch of Luckin Pop smart vending machines, which will be in airports, office buildings, college campuses and bus terminals. Luckin also plans to introduce a smart coffee machine known as Luckin Coffee Express.
“It allows us to get closer to consumers and we are not restricted by the license approvals,” Luckin CEO Qian Zhiya said of the vending machines.
Clearly it’s launching a direct broadside against rival Starbucks, and that’s the kind of moxie I like to see in a coffee contender. Personally, I appreciate the company’s aggressive attitude and consider Luckin a serious threat to Starbucks’ dominance — not only in China, but around the coffee-drinking world.
My Takeaway on LK Stock
I dare not try to predict the course of the coronavirus, as these types of assessments are best left to the experts. This is a challenging time and I pray for everyone’s health and well-being.
As for Luckin stock, I don’t see any need to unload shares right now since the company’s business model remains solid. Luckin’s vision for tech-enhanced coffee service should continue to add value for customers and shareholders alike.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.