Everybody wants to own the next Starbucks (NASDAQ:SBUX). Unfortunately, Starbucks is already practically a monopoly in the American coffee market. Shares of Starbucks aren’t that cheap anymore. Therefore, looking to the Asian market, some traders see Luckin Coffee (NASDAQ:LK) stock as a ticket to prosperity.
The coronavirus from China threw a proverbial wrench in the works, however. Since Luckin is a Chinese company, there are questions about whether the nation’s economy is on solid footing. Timing is everything when it comes to investing, so is this a good time to take a chance on LK stock?
Lately, LK stock has been zigzagging around, oftentimes out of tune with indices like the S&P 500 and China’s Shanghai stock index. That behavior is indicative of the pressure on companies selling Chinese consumer goods.
We all have probably heard by now that factories were shut down and workers sent home in China due to the coronavirus. Apple (NASDAQ:AAPL) basically admitted that their forward revenue guidance will have to be revised lower.
American stock traders might assume that the Chinese economy has stabilized. But like we saw with Apple, Luckin Coffee’s revenue expectations have been lowered. Even if the coronavirus were somehow stopped today, the economic ripple effect will persist for a while.
In Luckin’s case, the company was compelled to cut its first-quarter revenue guidance in half. The previous estimate had been 2.2 billion to 2.3 billion yuan. In dollar terms, that would be close to $315.3 million. The revised figure will have to reflect the reality of the virus’s impact on the Chinese economy.
I’ve heard folks from all walks of life say that the coronavirus numbers coming out of China are unreliable. They’re probably right about that. It would be awfully difficult to prove this claim, though.
It’s entirely possible that the death and illness stats will be revised higher at some point. That in itself could hit Chinese stocks and therefore Luckin shares as well. But there’s another transparency issue at play here. And, it’s specific to Luckin Coffee.
Specifically, Luckin has come under fire recently by Muddy Waters Research for fraudulent reporting. The research firm tweeted the following in a summary of its report:
“We received unattributed 89-page report alleging $LK is a fraud: ‘number of items per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q, supported by 11,260 hours of store traffic video’ We view the work as credible.”
The allegation might not be true. However, the public-relations fallout alone could haunt Luckin. For example, according to the report, “Luckin knows exactly what investors are looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence.”
This certainly paints Luckin in a poor light and forces shareholders and prospective shareholders to reconsider their confidence in the company.
Luckin denied the allegations, stating that “[t]he methodology of the Report is flawed, the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events.”
I consider transparency a key value for any company. As such, investors might consider waiting for the fallout of this alleged scandal to subside before taking a position in LK stock.
The Takeaway on LK Stock
The question of whether to hold Luckin Coffee shares remains an open one. Until the issues of the coronavirus’ full impact and Luckin’s transparency is fully realized, it’s probably best to stay on the sidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.