Luckin Coffee (NASDAQ:LK) is today’s hottest growth stock.
Investors are paying about 20 times revenue for the Chinese coffee to-go vendor. The shares are up almost 10% in just 24 hours, opening Feb. 19 near $40, a market capitalization of $10.2 billion.
When Luckin reports its fourth-quarter results, analysts expect a loss of 22 cents per share on revenue of $326 million. It’s that last number that’s attracting investors. Revenue for the September quarter was barely $200 million, and for the June quarter just over $100 million.
Investors are betting that the growth rate can scale, and that profits are just around the corner. Are they right?
Luckin’s Not Starbucks
The first thing to understand is that Luckin Coffee isn’t Starbucks (NASDAQ:SBUX).
Starbucks sells in China as a relaxing break, with the same couches and WiFi found in American stores, and recipes heavy on sugar and cream. Starbucks sells coffee as a luxury good. Luckin sells coffee as a pick-me-up. It delivers coffee to workers’ desks from kiosks. It also has vending machines. Luckin claims it’s just like Starbucks, just cheaper, Chinese and brought to you.
Luckin draws its market power from stock investors. At the end of September it had nearly $800 million in cash and short-term investments on the books, and over $900 million in stockholders’ equity, but no long-term debt.
Since going public in July 2018 at $17 per share, Luckin stock has taken off. Its high at the start of 2020 was above $50. Then came the coronavirus, which sent it to a low of $30.65. The shares are now in recovery mode.
Speculation Abounds
All this means Luckin is not a stock for conservative investors. It’s a stock for plungers, for young people with money to lose. It’s a very popular subject among InvestorPlace readers.
Most of our writers are signaling buy, buy, buy. Like Luke Lango they consider the coronavirus an opportunity to grab a bargain. Short-term panic will turn into longer-term gains, according to InvestorPlace analyst Matt McCall, because Luckin has more outlets than Starbucks and is growing faster. Larry Ramer also calls it a buy. He likes the vending machines.
What the bulls want you to ignore is an anonymous report by someone named Muddy Waters, a short seller, claiming Luckin has been inflating its revenue. But another short-seller, Andrew Left of Citron Research, told reporters he’s buying Luckin, calling it “on fire” in China.
While the coronavirus from China remains a wild card, according to Tom Taulli, the most cautious note comes from Will Ashworth, who predicts new competition will emerge in the next year. Luckin is overvalued, he writes, and doubling the store count to 10,000 in a crowded real estate market won’t be easy.
The Bottom Line on LK Stock
The coronavirus has sent down all Chinese restaurants stocks, but most analysts consider it a temporary condition.
That may not be the case. The government’s response to the virus has shaken public confidence. It reminds Chinese people that everything they have is conditional, upon the government’s actions.
The rise of Luckin is a symbol of China’s go-go nature since 1978. The virus reminds people that it can all disappear in a moment.
The numbers coming out next week won’t reflect any of that. They’re pre-virus numbers. For my money, I want more clarity before expecting the go-go days to return. I suspect tea is a more sustainable drink.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
