The coronavirus from China has created a lot of noise in financial markets, especially in Chinese stocks. One such stock, which has been stung particularly hard by the new virus from China is Luckin Coffee (NYSE:LK). The rapidly expanding Chinese coffee house operator has been forced to shut down a ton of stores in the wake of the outbreak and likely isn’t seeing much traffic in any stores that remain open.
Naturally, temporary store closures and reduced traffic imply that the company’s first quarter numbers won’t be that good. LK stock, which was red hot and flew from $20 in early November to $50 by late January, has since retreated in a big way.
Today, shares trade hands around $35.
In the big picture, recent weakness is nothing more than a buying opportunity in the stock. The novel coronavirus, much like previous epidemics, is a short-term headwind. Its adverse financial impacts on Luckin Coffee are similarly ephemeral. Meanwhile, the long-term growth narrative here is quite compelling, because Luckin Coffee is opening a ton of stores at a rapid pace in China, with a ton of room to keep doing so for a lot longer. And this is at a time when Chinese consumers are increasingly adopting coffee as a daily habit.
Thus, when it comes to Luckin Coffee, coronavirus headwinds will pass. Rising coffee consumption and retail footprint expansion tailwinds will not. This dynamic creates a perfect opportunity to buy the dip.
Near-Term Noise Won’t Last
Right now, there’s a lot of near-term noise surrounding Luckin Coffee. None of it will last.
Yes, the novel coronavirus has brought life in China to a screeching halt. Consumers across the country are barely leaving their houses, let alone going out to grab a cup of coffee. Luckin Coffee stores are either closed or empty. First quarter numbers will be pretty ugly.
But, this dynamic won’t last. Epidemics like the novel coronavirus happen all the time. They start, they spread, they peak and they fall. They usually last no more than a few months. This one may be even shorter, given how much progress has already been made on a potential treatment. Consequently, within the next few months, it is likely that daily life in China gets back to normal, and that Luckin Coffee stores start packing up again.
Meanwhile, amid the coronavirus outbreak, short-seller Muddy Waters released an anonymous report which asserted fraud against Luckin Coffee. Specifically, the 89-paged report — which analyzed receipt and video traffic data — said that Luckin Coffee was overstating its numbers.
This, too, is a short-term headwind. Short reports get issued against red-hot growth stocks all the time. It’s par for the course. This one is particularly uninteresting, because: 1) it’s anonymous and 2) it lacks scale, as less than 26,000 receipts were analyzed, while Luckin likely sold over 200 million items in the fourth quarter.
Long-Term Tailwinds Will Last
While the headwinds hitting Luckin Coffee right now are short-term in nature, the tailwinds supporting the growth narrative are not.
There are three major tailwinds here. First, China coffee consumption is on a rapid rise. Chinese consumers, who have historically opted for tea over coffee, are now opting for coffee over tea. This growth narrative still has a long way to go, as Chinese consumers drink about one percent as much coffee per capita as U.S. consumers.
Second, Luckin Coffee is leveraging a unique approach to win over consumers in China’s coffee market. This approach includes minimizing cost (they heavily discount their coffee) and maximizing convenience (they employ a mobile-centric business model designed for buy-online, pick-up-in-store orders). Because consumers always like low prices and not having to wait, so long as Luckin keeps winning on these value props, they will keep growing in popularity in China’s coffee market.
Third, Luckin is expanding its retail footprint very quickly. There were nine Luckin Coffee stores in China at the end of 2017. Today, there are about 4,500. That number is expected to reach 10,000 by 2021, and will likely keep growing after that. Consider that Starbucks (NASDAQ:SBUX) operates 16,000 stores in the U.S.
Long-term, these three tailwinds will continue to work together to propel Luckin Coffee’s revenue and profits materially higher. As those go higher, so will LK stock.
Bottom Line on LK Stock
Luckin Coffee is a long-term winner being dragged down by near-term headwinds, meaning the investment game-plan here is simple.
Let near-term headwinds shake out weak hands. Let the stock drop. Wait for the headwinds to pass. As soon as they do, buy the dip in the stock. Hold for the long haul. Let the long-term tailwinds power shares way higher.
Or, in other words, buy the dip in Luckin Coffee stock once coronavirus headwinds pass. Once they do, I think you’ll see this stock run back to $50.
As of this writing, Luke Lango was long LK.
