The longer-term outlook of upstart Chinese coffee retailer Luckin Coffee (NASDAQ:LK) remains extremely positive. But with the coronavirus afflicting China, longer-term investors and traders would probably be better off not pulling the trigger on LK stock just yet.
Earlier this month, Luckin announced that it would install “smart coffee machines” and “smart vending machines.”
The smart coffee machines will “[provide] freshly brewed drinks with the same quality and taste as in Luckin stores,” LK stated. The smart vending machines will allow “customers to enjoy the convenience of vending machines and low prices comparable to e-commerce,” the company reported.
The initiatives will enable Luckin to quickly and easily expand its footprint. If the vending machines prove to be popular, they will also likely meaningfully boost the company’s gross margins. That’s because the cost of operating the machines is probably a great deal lower than what the company spends on its stores.
Additionally, since the vending machines will include facial recognition technology and will be connected to the internet, Luckin could maintain lists of people who use its vending machines and send those customers ads for its stores. Consequently, the vending machines could help the company increase the traffic and sales of its stores, boosting LK stock in the process.
And importantly, representatives of Nestle (OTCMKTS:NSRGY) and PepsiCo (NASDAQ:PEP) participated in the ceremonial launch of the machines. Their participation is both validation of the strength of Luckin’s brand and a means of attracting more customers who like well-known Western products.
Luckin’s likely deals with Nestle and Pepsi could also mark the beginning of a virtuous cycle for Luckin. Specifically, as Luckin’s popularity in China increases, more top Western brands could make deals to have their products sold by Luckin. Selling more top Western brands, in turn, could increase Luckin’s popularity, starting the cycle again.
Hedge Funds, Analysts Have Become More Bullish on LK Stock
Also likely to boost Luckin over the longer term is the Street’s increasingly bullish view of the shares. In recent weeks, two prestigious hedge funds have bought the stock and at least two major research firms have issued upbeat notes on the company.
In early December, Barron’s reported that hedge fund Lone Pine Capital had bought 6.1 million shares of LK last quarter. The fund was founded by multi-billionaire Stephen Mandel, whom the publication called “a legendary stock picker.” Mandel stepped down from managing the fund’s day-to-day operations at the beginning of 2019, but is still its managing director.
Another hedge fund, Melvin Capital, reported owning 5.5 million shares of LK stock in November, up from 2.9 million in June.
Further, Chantico Global founder and CEO Gina Sanchez recently told CNBC that Luckin was generating “massive” margins, making it “a really interesting long-term buy,” Yahoo Finance reported. She added that its innovations have been effective. Perhaps more impressively, TradingAnalysis.com founder Todd Gordon was quoted as saying that “clearly, Starbucks is having no luck against Luckin.”
On the analyst front, KeyBanc last week raised its price target on Luckin’s shares to $56 from $32, while Credit Suisse reinstated coverage of LK with a $54.40 price target and an “outperform” rating.”
Wait for the Coronavirus to Be Contained Before Buying Luckin’s Shares
As mentioned earlier, a potentially deadly virus, called coronavirus has infected hundreds of people in China and killed nine people there. Moreover, this week “hundreds of millions of Chinese” are expected to travel to celebrate the country’s Lunar New Year, CNBC reported.
But China’s government and other countries seem to be proactively dealing with the outbreak, conducting widespread testing for it and disclosing a great deal of information about its spread. Further, AstraZeneca’s (NYSE:AZN) CEO told CNBC on Jan. 22 that the disease appeared to have been contained for the time being.
Nonetheless, with Luckin having jumped nearly 200% since its May IPO, the shares are vulnerable to declines in the short-term as investors worry about the coronavirus’ impact on China and its economy, resulting in some profit-taking. Those whose investments in Luckin have doubled or tripled may want to lock in some of their profits and buy back the shares on pullbacks over the next couple of weeks. People thinking about buying the stock for the first time should at least wait until the New Year holiday is over or until Luckin has dropped to around $45. Cautious investors may want to wait for more signs that the coronavirus has been contained before purchasing their first shares of Luckin.
The Bottom Line on LK Stock
Luckin has a great future ahead of it. I pointed out many of its strengths in my December 2019 column in which I named it as my top pick for 2020. I noted that Luckin’s “coffee is meaningfully cheaper than the offerings of Starbucks,” pointed out that Luckin’s locations tend to be very convenient and touted the company’s huge opportunities in tea and overseas.
Now the company’s vending machine initiatives and its apparent partnerships with Western heavyweights have made its longer-term future even brighter. Luckin, which now has a market cap of $11.6 billion, looks poised to, within the next three or four years, approach or even equal Starbucks’ current market cap of $109 billion.
Nonetheless, investors can probably get a better entry point on Luckin by waiting for the shares to drop further amid uncertainty about the coronavirus outbreak.
As of this writing, Larry Ramer owned shares of Luckin.
