As the coronavirus from China continues to spread from its epicenter to other parts of the country and the world, the implications for several publicly traded companies is obviously negative. However, according to contrarians, Luckin Coffee (NASDAQ:LK) may escape some of the devastation due to other organizations. Essentially, the restricted movements for many in China may spark coffee sales, lifting the case for LK stock.
Admittedly, the bullish narrative is not without merit.
One of the key distinguishing factors that separate LK stock from rival Starbucks (NASDAQ:SBUX) is the underlying business model. Rather than focusing on a large physical footprint where shoppers can lounge about, Luckin focuses on small stores and kiosks. Often integrated with office buildings and college campuses, the point here is to get in and get out.
Clearly, this model has a huge advantage over the Starbucks’ experience during the coronavirus experience. Less time spent mingling with other people cuts down on your probability of infection. Thus, the contrarian bullishness toward LK stock.
Furthermore, Luckin Coffee is expanding on their “pay-and-go” system with unmanned kiosks and vending machines. Theoretically, this removes the human element altogether. Additionally, you can get your cup of joe without worrying in the back of your mind if your server has the virus.
Again, this paints the stock in a superior light relative to Starbucks and similar businesses, such as McDonald’s (NYSE:MCD). However, my contention is this: just how likely are you to go anywhere if you don’t have to?
While coffee is one of my vices, I can’t imagine risking my life for it. Without precise information on how the coronavirus spreads, I believe Luckin Coffee is not worth the risk right now.
The Outbreak Is Too Much of a Variable for LK Stock
Over the years, I’ve noticed that some investment gurus like to get snarky with each other, claiming that you shouldn’t take advice from people who haven’t accomplished runaway success. Well, with the coronavirus, this criticism cuts both ways: you shouldn’t take medical advice from money gurus, especially when infectious disease specialists are still grappling with the coronavirus outbreak.
Recently, the Washington Post declared that the situation edges closer to a pandemic. As the Post describes it:
“In South Korea, coronavirus cases quadrupled over two days, as 144 people linked to a religious sect tested positive. In Singapore, clusters of infection have been traced to two churches, a hotel business meeting, a health products shop and a construction site. In Iran, an outbreak has seeded new cases in Lebanon and Canada — a worrisome sign the disease could be spreading more widely than realized.”
But according to the bulls, this is an “opportunity” for Luckin Coffee. I’m sorry but I just don’t see it.
Why in the fire and brimstone of damnation would you ever even consider going outside in China if you don’t have to? If I really wanted coffee that badly, I’ll make it myself … thank you very much! Even with unmanned kiosks, the coffee must be served somewhere. And if the surrounding air is contaminated, well, you get the picture. If you don’t, you only need to look at the Diamond Princess meltdown. From one reported infection, the coronavirus spread to 634 people, killing two, despite Japan’s imposed quarantine. From logical deduction, close proximity to the infected dramatically increases your risk of illness.
To go out and buy Luckin Coffee (or do anything non vital) is really asking for it.
Not Like Any Other Epidemic
Some market analysts still insist that the coronavirus crisis will fade like other epidemics in the past. I hope that’s the case. However, hope is a luxury we don’t have.
Interestingly, The Hill reported that President Trump was furious after learning U.S. officials allowed infected Americans from the Diamond Princess to return home with other passengers. I’m 100% with Trump on this. There is no need to take risks with the coronavirus.
And that’s the message I have for those thinking about buying LK stock right now. Relative to where it was for most of last year, shares are incredibly elevated. Thus, if you’re dead set on Luckin, I’d look for a better entry point.
Sure, if the coronavirus is like any other disease, not buying now is an opportunity cost. However, almost every mainstream media outlet (and even the loony conspiratorial ones) are currently sounding the alarm bell. Perhaps a better question to ask is, are they all wrong?
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.