[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.]
Over the past month, Luckin Coffee (NASDAQ:LK) has declined over 9%. Though it may not seem like it, that’s good news for two reasons.
First, that trading seems strong in this panicked market. Outside of the plunging travel sector, few stocks seem worse-positioned for this sell-off.
The coronavirus originated in Luckin’s home market. Restaurant stocks more broadly now are rolling over. U.S. counterpart Starbucks (NASDAQ:SBUX) is down almost 22% over the past four weeks.
And yet LK stock is holding up. It’s actually modestly above where it traded when I recommended it as a “buy the dip” candidate in early February.
The second aspect of the sell-off that’s good news is that LK stock is back where it traded in early February. This, after all, is a stock that went from under $20 in November to (briefly) over $50 in January.
That rally made sense. A blowout third-quarter earnings report highlighted the company’s incredible growth. Q3 removed the unfair stigma Luckin Coffee stock received as a 2019 initial public offering. That group included “growth at any cost and any price” names like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), many of which struggled out of the gate and have fallen even further in this market rout.
LK stock is not one of those names. It’s a multi-year, and likely multi-decade, growth stock that is going to create real value for shareholders. The only piece of bad news, for investors with a long-term focus, is that it’s not even cheaper.
Stay Calm
The headlines around the coronavirus are unsettling. There’s going to be a short-term economic impact in the U.S. and worldwide. But investors don’t need to panic.
As I detailed in a special video podcast this week, market corrections can be opportunities. In fact, they almost always are.
The crash of 1987 was terrifying. U.S. stocks would rally sharply from those levels. Investors who bought stocks during the financial crisis — even if they were early in doing so — generally have at least doubled their money. Many have done far better.
That doesn’t mean investors need to go flying into the market today. It doesn’t mean every stock is a buy. But it does mean that investors should keep their wits.
That’s particularly important for Luckin Coffee stock right now. After all, this is a name investors in this market could easily dismiss. The entire world is focused on the spread of the coronavirus. That virus began in China. Luckin has closed stores in response.
Meanwhile, the company remains unprofitable, and many investors see higher risk in China than elsewhere in the world. The knee-jerk response to LK stock right now might something close to: are you nuts?
The Case for LK Stock
Simply put, no. Again, keep your wits and take the long view.
For Luckin, the coronavirus is still a blip, if a tragic one. The company originally planned to open 10,000 stores by 2021. That goal may be pushed back, but it’s still intact.
Luckin already has passed Starbucks in terms of the number of locations. It’s converting tea-favoring Chinese consumers to coffee. There are literally decades of growth ahead through both more stores and higher sales per store. And with the company’s impressive tech — customers pay online through the Luckin app — profit margins will be higher than most in the industry.
That long-term story hasn’t changed. And Luckin will have a chance to remind investors of that fact. Fourth quarter results should arrive in the next week or so. Given that period ended Dec. 31, there will be no impact from the new virus in the results.
In the third quarter, net revenue increased a staggering 557% year-over-year. Investors looking at fourth quarter results are going to see a company posting mind-boggling growth while trading at something like 14x revenue. They will be reminded of that long-term opportunity.
Barring another steep leg down in this sell-off, I expect the reaction in LK stock to those numbers will be favorable.
An Opportunity
Again, I’m not recommending investors plow their life savings into Luckin Coffee stock today. There’s likely still a lot of volatility ahead in this market. LK stock well could get cheaper in the short-term.
But it matters that the stock has held up. It matters that its growth tops that of almost every other company on the public markets. And the long-term opportunity here is real.
I still believe that stocks are going to rally after this short-term blip. I believe Facebook (NASDAQ:FB) will be one of the big winners. And LK stock should be another one. The world, and the market, will get back to normal at some point. And ‘normal’ for Luckin Coffee is market-beating growth and huge upside.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
