Earlier this month, Luckin Coffee (NASDAQ:LK) got a huge lift thanks to news of its new smart vending machine strategy. However, after reaching a price of more than $50 on this news, LK stock is now down 20% to ~$40 on virus fears.
With the coronavirus outbreak in Wuhan, China, currently having infected nearly 6,000 people worldwide, many investors have started to shy away from Chinese stocks like Luckin Coffee.
Although concerns of the virus’ impact are certainly justified, we should still question whether it’s time to dump LK stock.
Do the current risks outweigh its potential for success?
The panic regarding the coronavirus has taken a massive toll on the stock, and the damage might continue as concerns grow. But before you write Luckin off completely, let’s first look at some of its potential catalysts.
These might help it overcome the still to-be-determined impact of the virus.
There’s Still Hope for Luckin
The big boost LK stock got on news of its “smart unmanned retail strategy” was not unjustified.
Ideally, the Luckin Coffee vending machines will help spread its brand adoption throughout China. While fewer customers might enjoy its beverages directly in its branded stores, they will ultimately still enjoy its brew. Over time, this will theoretically encourage more people to enter its stores over top competitors like Starbucks (NASDAQ:SBUX), and lead to significant long-term growth.
Also consider that the potential benefits of these machines extend beyond customer growth potential. “[T]hey will also likely meaningfully boost the company’s gross margins,” InvestorPlace.com contributor Larry Ramer notes. “[T]he cost of operating the machines is probably a great deal lower than what the company spends on its stores.”
Clearly, Luckin is positioning itself wisely for expansion throughout China. Analysts at Morgan Stanley agree with this bullish sentiment, with the firm boosting its target price on the stock from $27 per share to $42. LK stock has climbed back up more than 7% on the renewed price target, even with virus concerns looming.
In addition to the unmanned retail strategy, Morgan Stanley cites Luckin’s developing tea business as another reason for optimism. Both of these initiatives will be key in “enabling ‘efficient network expansion without intensive capital commitments.'”
How to Approach LK Stock Now
The Chinese competitor to Starbucks has made a name for itself, more than doubling in price since its IPO on May 17, 2019. LK stock still shows significant promise as the company behind it aims to satisfy customers’ growing thirst for its beverages.
Although its possible that the coronavirus might have a long-lasting impact on Luckin and the world more broadly, it’s too soon to suggest that now’s the time to sell the coffee stock. It would be an easier argument if the company didn’t have significant long-term potential in a country with the world’s largest population.
But LK stock simply has too much promise to make any quick-fire decisions on.
According to InvestorPlace.com Contributor Luke Lango, the virus concern surrounding Luckin Coffee is overblown. He argues that the threat of the virus isn’t as significant as the SARS outbreak in 2003. And he even points out that the impact of that wasn’t as strong as you might think:
“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.”
I’m far more cautious than Lango when it comes to this, but I see his point.
I’m no expert on how threatening or non-threatening a virus may be. But the long-term case for Luckin is strong enough that it deters me from being overly bearish on the stock for now. But I would still use plenty of caution.
If analysts like Lango are correct, then Luckin will ultimately make a huge comeback when the virus loses weight in investors’ minds. And that would be a significant short-term catalyst all on its own. But if he’s wrong, then sentiment regarding Luckin’s long-term prospects will continue to dwindle for much longer.
For now, I suggest waiting on the sidelines until the overall threat of the virus is more clearly accessed.
Robert Waldo has been a web editor for InvestorPlace since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.
