[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.]
China’s Luckin Coffee (NASDAQ:LK) has become a “blood in the streets” opportunity.
While coronavirus fears and allegation of fraud took the wind out of its sail, the long-term growth story is still very much intact. With patience, I believe LK stock could double. The long-term growth story is tough to ignore with this name.
Concerns are fading for Luckin Coffee. Granted, the COVID-19 story is still making its way around the world. However, in China, the number of new cases is beginning to drop, helping to alleviate concerns. In fact, the number of new cases has dropped dramatically.
“The risk of virus spreading widely in China has passed,” Hu Xijin, editor-in-chief of the Communist Party publication the Global Times. “Wuhan is still in lockdown while new infection cases are steadily decreasing, even disappearing, in other areas.”
In addition, claims of fraud at the coffee QSR are a bit overdone.
Reportedly, short-sellers Muddy Waters Research alleged the company fabricated its financial and operating numbers beginning in the third quarter of 2019. However, Luckin called the report “flawed” and that “evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events.”
In short, it’s best to ignore the noise and buy on the long-term opportunity.
China’s Drinking More Coffee
“China’s rising urbanization and disposable income have been and are expected to continue to be the main growth engines of its coffee industry, and more and more people in China have begun to consume more coffee in their daily lives,” says the company.
Granted, per capita consumption averages three cups a year, as compared to 363 in the U.S. But the market is expanding, growing eight times faster than the world average, according to the International Coffee Organization, as noted by Raconteur contributor Amy Hawkins.
Plus, the annual growth rate of coffee consumption in China is about 20%, which is more than 2% above the global growth rate. As this number increases, analysts believe the value of the coffee market in China could reach billions of yuan within the next 10 years. That’s a lot of lattes.
In short, there’s plenty of growth in store for coffee purveyors like Luckin Coffee.
Earnings Shortfall Ahead
While the company does expect for first-quarter revenue to come in around half of current estimates of 2.2 billion CNY ($315.3 million) to 2.3 billion CNY, that’s to be expected. All thanks to the coronavirus, KeyBanc Capital Markets analyst Eric Gonzalez said.
However, the company is confident consumers will return to stores once the virus fades. It also reiterated expectations for achieving breakeven in the third quarter. Gonzalez also believes the company’s targets are still achievable with a $56 price target.
Bottom Line on LK Stock
Despite market noise with the coronavirus and allegations of fraud, there’s still plenty of opportunity in store for this stock. With patience, I believe shares could double, especially with coffee consumption rapidly rising throughout China.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.