[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 is getting back to normal, having beaten the coronavirus with a policy of strict quarantine. Now many American investors assume everyone there is ready for a cup of nice, hot Luckin Coffee (NASDAQ:LK). Luckin stock is down 30% from February, but that’s not bad given what has happened to the rest of the market.
The company was fortunate to bag a $865 million equity raise in January. It was ostensibly for expansion. But it also got the company through the worst of the economic storm.
Pounding the Coffee Cart
Since then, analysts have been pounding the table for Luckin, calling it a Starbucks (NASDAQ:SBUX) rival, even though it mainly runs kiosks and delivery services, not stores with seats.
InvestorPlace advisors have been among the bulls. Matt McCall has called Luckin one of the market’s best opportunities, because of how well it held up in the market crash.
Luckin’s rapid growth justifies a higher stock price, writes Chris Lau. He was pleased with how the stock fended off a short-sale attack by analyst Muddy Waters, calling its methodology flawed. The shares held up during February and didn’t start falling in earnest until early March. As the slide commenced, traders jumped into $17.50/share puts, and the shares bounced off a low around $25.
Luckin has been expanding into tea, hoping to fend off upstarts like Naixue’s Tea, which is planning a U.S. public offering once markets return to normal.
Guessing Games
During what now looks like the worst of the crisis, McCall emphasized Luckin’s long-term strengths. But investors will only be guessing about results for some time.
The company’s most recent report, considered outstanding, had revenue more than tripling from a year earlier. But it was issued in November. Luckin is next due to report April 1, with a loss of 26 cents per share on revenue of $330 million expected. But that only covers the pre-virus December quarter. The September quarter is still unaudited.
Then there’s a question about those numbers.
Luckin faces lawsuits, alleging that its third quarter report inflated sales numbers.
Bullish analysts insist Luckin is well-run, that it’s disrupting Starbucks through efficiency and technology. A $2 cup delivered to your desk is cheaper than a $5 cup you buy at a shop.
The problem is that, if Luckin’s main advantage is price, when are Chinese workplaces going to get Keurig Dr. Pepper (NYSE:KDP) machines and brew their own? All that’s needed to make a good pot of coffee are some beans, a grinder, hot water and a carafe. The Costco Wholesale (NASDAQ:COST) brew I enjoy costs about $7 per pound.
How fast Luckin can grow, and how big, remains something of a guessing game.
In order to keep growing, once the country is saturated with kiosks, Luckin will have to continue product innovation, and pay its people. In the end, coffee is a human experience, or it’s a commodity. At some point, the novelty of the current model is going to disappear. Is Luckin ready for the market maturing?
The Bottom Line on Luckin Stock
The coronavirus has exposed great bargains in the market. Luckin stock may be one of them.
But for me there are better bets. There are tech stocks, cloud stocks and retail stocks in the food chain. There are stocks that were hit a lot harder than Luckin, where business will soon return. There is Starbucks itself, also selling for about one-third off.
In other words, there are sure things in the new market. You don’t have to take a chance to find a profit.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
