[Editor’s note: This story was written prior to the news that Luckin Coffee allegedly fabricated its sales. Given these allegations, all investors should approach this stock with great caution.]
Without the coronavirus from China, the narrative around Luckin Coffee (NASDAQ:LK) would be much different. However, coronavirus is our reality right now, and the current selloff has dealt a blow to all growth names, including LK stock.
The stock is down about 50% from the highs it reached in January. The virus’s outbreak began in China, which is not a good situation for a China-based coffee chain. Moreover, the outbreak around the world and the resulting global pandemonium have led to a rout of the stock market. That hasn’t been good for Luckin stock either.
Unfortunately, the stock has to fight two negative catalysts: the outbreak in China and the volatile stock market. But that’s just how it goes, and the stock’s volatility can lead to buying opportunities.
Trading LK Stock
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I’m starting with Luckin’s charts because I believe that visual representations can be the most helpful tool for investors. On the daily chart above, the wild month of January is shown. Luckin’s shares ripped from $34 to $50 in just a few weeks, before tumbling below $28, its low point of the month, at the end of January.
LK stock quickly rallied back into the upper $30s, but with all the events that are occurring, its shares simply couldn’t maintain their bullish momentum. To be honest, I think we need to give the stock credit for hanging in there as long as it did.
However, the stock’s technicals have started to crack over the past few days. The shares sank below their 100-day moving average, allowing them to drop down to their $28 support level. That level held momentarily, but eventually gave way. The 200-day moving average only held up briefly.
LK stock recently hit a low near $24 before rebounding a bit. Going forward, the stock needs to reclaim the 200-day moving average and the $28 level for bulls to regain some control. If it doesn’t reach either of those levels, it could fall further, potentially creating a “buy, buy, buy” situation.
I’m not sure if Luckin stock will fall to $18, but such a decline could prove to be a solid buying opportunity. That level has been support since the company went public last year. If that support breaks,$14 to $15 could be on the table. For long-term investors, buying the stock in the teens will likely be rewarding.
Sizing Up Luckin Coffee
Why will buying Luckin’s shares for $18 or less prove to be rewarding over the long-term? Simply because Luckin Coffee’s growth is through the roof. Several years ago, Starbucks (NASDAQ:SBUX) began rapidly expanding in China. The American company started opening 500 stores per year in China and made the country a major priority.
Of course, as a coffee chain expands throughout a nation of 1.38 billion people, it’s bound to pick up some competition. Right now, that competition is Luckin Coffee, which is opening an incredible number of locations.
Below are some charts which detail the global coffee market and emphasize the potential of China. They also show the long-term trajectory of the coffee market.
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After Luckin generated $128 million of sales in 2018, analysts, on average, expect the company to report $744 million of revenue in 2019. That gives us a sense of just how quickly Luckin is growing right now. By the way, the company’s fiscal 2019 results are slated to be reported on Mar. 26.
In FY20, analysts expect the company’s sales to be north of $2 billion. While that’s the kind of number that makes you say “whoa,” we know that the company’s sales may not reach that level due to the coronavirus. I think the sales of virtually all retailers have halted during the outbreak. The strength of the rebound is what Wall Street is still uncertain about, as there is simply no way to know that.
Luckin probably won’t hit analysts’ FY20 revenue target, but that’s OK. Its likely lower-than-expected results are being priced into LK stock as we speak. But the fact that analysts expected the company’s sales to exceed $2 billion just goes to show how quickly this company is growing.
While Luckin will be hurt in the short-term by the coronavirus, its long-term growth outlook is still great. If investors can buy Luckin for a cheap price, they may be very happy several years down the road.
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.
