The bull case was recently muddied with Luckin Coffee (NASDAQ:LK). Admittedly, I do say that tongue in cheek, after a short-report from Muddy Waters hammered LK stock. The bulls resiliently bid the stock back up from its lows, but volatility persists.
As worries of the coronavirus were running rampant at the end of January Muddy Waters’ short stake and report sent shares of LK stock spiraling lower in intraday trading. The move also came on a tough day in the stock market, which certainly didn’t help matters.
Essentially Muddy Waters alleges that Luckin Coffee is inflating its numbers. It allows growth and its business to look stronger than it really is, they argue. Of course, the Luckin has denied the allegations. Interestingly enough, another well-known short-seller stepped up in Luckin’s defense: Citron Research.
Citron’s Andrew Left tweeted that “biz is on fire in China. Citron has respect for Muddy, but this [anonymous] report will fall short on accuracy.” Additionally, he said Citron is long LK stock.
This feels like a miniature version Bill Ackman vs. Carl Ichan over Herbalife (NYSE:HLF). In any regard, that’s what’s adding extra volatility into the stock lately. Let’s look under the hood.
Valuing Luckin
To many investors, Luckin Coffee is flying under the radar. The $10 billion coffee chain has manufactured the definition of exponential growth, while it stands toe-to-toe with the $100 billion Starbucks (NASDAQ:SBUX). The latter continues to open stores like mad in China and has been doing so for years. It only made sense that competition would crop up.
Eventually, there’s a saturation point, but we’re clearly not there yet.
According to the company’s F-1 filing, LK stock had revenue of just 215,000 RMB in fiscal 2017. Essentially, nothing. In fiscal 2018, the company exploded to sales of 649.6 million RMB. Through the first three quarters of 2019, sales have swelled to 1.15 billion RMB.
Further, look at how fast it’s growing its store count. Total store count has gone from 1,189 in September 2018 to 3,433 in September 2019. A bulk of these locations are “pick-up stores,” but it’s still helping to fuel the company’s growth.
As for expected growth, 2020 is a potentially pivotal year for LK stock. Analysts expect the company to swing from a loss to almost break-even results while accelerating revenue by almost 200%. Man, the growth here is jaw-dropping, but is it realistic?
I have been a very long-term investor in Starbucks, partly because of its potential in China. With Luckin in the mix, I think it too has big-time potential. With a $10 billion market cap, investors are certainly paying for it. But if it can deliver, I have no doubt this one can see $50-plus again.
One wild card? The coronavirus. As the infection count and death toll climb, concerns rise as well. In China, there will certainly be an economic impact. The question becomes, how much of an impact will it have on business and how willing will investors be to overlook it?
That’s something to keep an eye on this quarter.
Trading LK Stock
LK stock closed off its highs, but near $50 in midday January. It then shed almost 50% of its stock price in just a few weeks when looking at intraday prices. On a closing basis, Luckin held up a bit better, but it’s still been a tough ride.
Ultimately, prior resistance at $34 held as support and LK stock has since reclaimed both the 20-day and 50-day moving averages. If it can reclaim $40, the bulls will certainly be controlling the fight, while reclaiming prior uptrend support puts them firmly in the driver’s seat.
If $40 acts as resistance or if LK stock fails to hold the 50-day moving average, $34 support will again be on the table. Below puts the 200-day moving average and the $28 level on watch.
The Bottom Line on LK Stock
The coronavirus will have impacted business for LK stock, but we’re not sure how much. If we assume the Muddy Waters allegations are false, then Luckin is running a growth machine at the moment. The valuation on a forward basis isn’t absurd and the bulls have momentum on the chart.
Right now, I’m inclined to side with the longs on this one, although snagging LK on a discount would be preferable given the potential impact of the coronavirus and the recent increase in volatility.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long SBUX.
