For companies that go public, they usually have been around for some time (often more than a decade). This is largely due to the huge amounts of venture capital available.
But there are some exceptions, of course. Just look at Luckin Coffee (NASDAQ:LK), which is a Chinese-based coffee retail operator. In October 2017, Jenny Zhiya Qian co-founded the company. And yes, she wasted little time.
The company has been one of the fastest retail startups ever. At the end of the latest quarter, the company had 3,680 stores, up from 1,189 from the same period a year ago. Here are some other growth metrics:
- The average monthly total items sold hit 44.2 million, up from 7.8 million on a year-over-year basis.
- For the past 12 months, the average monthly transacting customers per quarter came to 9.3 million, up nearly 400%.
- In the quarter, the company acquired 7.9 million new transacting customers.
While LK is often touted as the next Starbucks (NASDAQ:SBUX), this really does not do it justice. Keep in mind that LK has put together a unique playbook. If anything, it’s something that has caught SBUX off guard.
For the most part, the LK model is about a blend of technology, quality, affordability and convenience for customers. For example, the network of stores includes pick-up locations, relax stores and delivery kitchens (although, the pick-up locations comprise the majority of the stores). As a result, LK is able to be ubiquitous while also benefitting from lower rent.
As for customers, they can use the LK mobile app to make transactions without a need for a cashier, with payments handled through services from Tencent’s (OTCMKTS:TCEHY) WeChat and Alibaba’s (NYSE:BABA) Alipay. To enhance this, the company has leveraged technologies like artificial intelligence, big data and predictive analytics to better personalize the experience.
Luckin’s Growth Machine
The latest quarter highlighted the power of the LK model. Note that revenues spiked by a blistering six-fold to 1.54 billion yuan (or about $215.7 million), which handily beat the Street estimates.
And there are few signs that the momentum will slow down any time soon. As for the fourth-quarter guidance, LK is calling for revenues from products of 2.1 billion yuan to 2.2 billion yuan.
The company is also bolstering the growth by entering new categories. That is, LK launched its new line of tea products in July, which has gotten off to a robust start.
Granted, the losses are high. They were 531.9 million yuan in Q3, up from 484.9 million yuan in the same period a year ago. But such losses are expected because of the heavy costs of building the infrastructure. But of course, coffee has high margins. So, getting to profitability could be a possibility in the next few years.
Finally, the good news for LK stock is that there is much more room for growth. The fact is that the Chinese market is underpenetrated when it comes to coffee, with an average of about three cups per year. By comparison, it is 360 cups in the US! According to InvestorPlace’s Luke Lango:
But, China’s consumers, especially the young ones, are starting to adopt Western coffee drinking habits in a big way, and coffee consumption rates throughout the country have been growing at a steady 20% pace for several years. Further, because this is a youth-driven trend, it is likely to persist in a big way for a lot longer.
Bottom Line on LK Stock
As seen with other initial public offerings during the past year – such as with SmileDirectClub (NASDAQ:SDC), Uber Technologies (NYSE:UBER) and Lyft (NASDAQ:LYFT) – the risks are certainly significant. So, when it comes to LK stock, it’s a good idea to be cautious and be willing to stomach volatility. But for those interested in a big-time growth play on China, the company does look like a pretty good choice.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.