China’s Luckin Coffee (NASDAQ:LK) has had an interesting 10 months following the company’s initial public offering (IPO) in May 2019. The company’s stock remained essentially flat until last November, when its Q3 earnings report showed breakneck growth. That news launched LK stock from $18.56 to $50.02 in just three months.
However, lawsuits alleging the company inflated some of those impressive growth numbers are taking the wind out of the LK sails. Add the coronavirus from China to the mix, and Luckin Coffee’s near-term future is looking a little uncertain.
With LK stock currently around $39, is now the time to invest in Luckin Coffee?
“The Mother of All Coffee Opportunities”
China is a massive country with a massive population. Consumers are growing more wealthy and acquiring a taste for Western products. As part of that, demand for coffee in the country where tea has been the traditional hot beverage of choice is increasing, especially in urban centers.
According to Raconteur, per capita coffee consumption in China in 2019 was just three cups per year, compared to 363 cups for American consumers. However demand for coffee in China is now growing at eight times the global average. Professor Jeffrey Towson of Peking University told Raconteur that “increasing consumption in China is the mother of all coffee opportunities.”
This has put China in the crosshairs for coffee chains: China is the second largest market for Starbucks (NASDAQ:SBUX). Homegrown startup Luckin Coffee — which launched in 2017 — is aggressively taking on the American giant.
Q3 Earnings and Subsequent Lawsuit
In February, several lawsuits were filed on behalf of investors who bought LK stock after November 13, 2019. The suits allege that the rapid growth in value of LK — which closed at $18.56 on November 12 — was due to false and/or misleading statements that violated federal securities laws. Among the allegations are claims that the company inflated store sales data, including the number of items sold per store per day, and the net selling price per item.
The numbers in question were part of Luckin Coffee’s Q3 earnings report. The company posted some pretty impressive numbers. This included revenue up 557.6% year-over-year, average monthly customers up 397.5% YOY, and an increase in the number of stores from 1,189 in Q3 2018 to 3,680 in Q3 2019.
Those lawsuits have just recently been filed. And although they’ve knocked down the value of LK stock, they have yet to hit the trial stage.
What About Coronavirus
InvestorPlace contributor Josh Enomoto previously wrote that the coronavirus outbreak in China has significant implications for businesses like coffee shops. Will customers put themselves at risk to go out and buy a cup of coffee, standing in line with other people who might be contagious? Enomoto points out that Luckin Coffee takes a different approach than Starbucks. Its focus on small shops, kiosks and an expanded push into vending machines could give the coffee chain an edge with Chinese consumers who need their caffeine fix — virus be damned.
That potential to weather the crisis and possibly even thrive as it hits competitors might help to explain why LK was up 3.59% on Tuesday, when the markets were tumbling over coronavirus worries.
Bottom Line on LK Stock
What does the future hold for Luckin Coffee? In the near term, the investor lawsuits are a problem, and the coronavirus has the potential to end up doing real damage to the coffee chain’s sales.
Investors ought to weigh those risks against the company’s long term prospects. It’s a rapidly expanding company that sells a product in high demand from consumers, in a market that still has room for tremendous growth. Not many investment analysts currently weigh in on Luckin Coffee, but those who do rate it as a consensus “buy,” despite the current challenges the company faces. And they give it a median 12-month price target of $50.84, for nearly 33% upside.
If you’re willing to bet against the current lawsuits and coronavirus knocking LK stock down further, it has solid potential as a long-term investment.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.