Luckin Stock May Lose Some of Its Flavor From the Coronavirus

Luckin Coffee (NASDAQ:LK) acts more like a red-hot tech company, not a brick-and-mortar operator. But then again, the company’s CEO and founder — Jenny Zhiya Qian — has a technical background from her previous experience in the automobile industry. And that’s a good thing for Luckin and LK stock.

LK Stock May Lose Some of Its Flavor From the Coronavirus

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Overall, Qian has infused the company’s operation with lots of technology. For example, she has created a sophisticated app that seamlessly handles payments from Tencent’s (OTCMKTS:TCEHY) WeChat and Alibaba’s (NYSE:BABA) Alipay. There has also been a leveraging of AI (Artificial Intelligence) and analytics, which have led to better personalized customer experiences.

This is how the company describes itself:

“Luckin Coffee is the pioneer of a technology-driven new retail model to provide coffee and other products of high quality, high affordability, and high convenience to our customers.”

The strategy has certainly been a recipe for blistering growth, as seen with the latest earnings report. Revenues soared by 558% to $208.9 million, and the average monthly total items sold came to 44.2 million — up 470%. By the end of the quarter, there were 3,680 stores, up more than 200%. The result is that, in a matter of a couple years, Luckin is rivaling the footprint of Starbucks (NASDAQ:SBUX).

The Risks of LK Stock

Since its IPO in May of last year, Luckin stock has been the source of much volatility. The shares have ranged from $13.71 to $51.38. And as of now, the current price on LK stock is around $39 — which actually represents more than a 90% gain since IPO.

It’s true that volatility is normal for IPOs. And let’s face it, these investments are usually for early-stage companies where the business models are still being tested. So, yes, this is the case with LK stock.

Lately, however, there have been some issues that have popped up that go beyond the typical gyrations. First of all, there was the release of a report from Muddy Waters Research, which was based on video of floor traffic for Luckin. The takeaway? Well, it was ominous. The allegation was that sales were essentially being inflated.

Granted, this report should be taken with a grain of salt. After all, it was based on anonymous sources. It also was just a small subset of the activity for Luckin. However, the report was still important enough to knock down the company’s shares.

Additionally, there is another risk that has been weighing on LK stock: the coronavirus from China. As seen this week, it continues to grow at a scary pace and it is far from clear if we know the true numbers. It has also led to widespread quarantines and lockdowns of various cities.

Overall, it’s not clear how long this will last. But even if the impact is relatively short, there could easily be a plunge in sales for Luckin. Furthermore, given the company’s hyper-growth strategy, the disruption could be particularly damaging. And it can be tough to dial back on operations when there is a deceleration.

Bottom Line On Luckin Stock

Over the next few years, I’m actually bullish on LK stock. The market opportunity is enormous, and the company has an innovative business model. Although, I still think there is considerable downside potential in the near-term.

Consider that the valuation is already frothy, with Luckin stock trading at a staggering 19 times sales. This is even on the high-side for tech companies.

In other words, the best approach is to be patient on LK stock because chances are that you will be able to get a better price on the shares.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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