This week saw the stock market fall meaningfully lower despite policy moves by the Fed. Words like ‘recession’ and ‘financial crisis’ are everywhere, and investors are starting to panic. But times like these have historically been opportunities for level-headed investors. That doesn’t mean you should dive head-first into the market, but putting together a watchlist of quality stocks to buy during the downturn is a good first step. Luckin Coffee (NYSE:LK) isn’t immune to the chaos, but the long-term growth story for LK stock remains intact.
Luckin’s growth was impressive in the weeks before the coronavirus from China hit and investors were cheering the firm’s long-term strategy. While the virus’ impact will probably result in some painful quarters, the long-term case for Luckin remains intact.
LK Stock and Coronavirus
It’s important to note that Luckin stock has been hurt by the coronavirus just like the rest of the market. The China-based coffee chain had to shutter its operations as the virus ripped through the nation, a necessary but likely painful measure.
Although the situation in China appears to be improving, Luckin, like most other Chinese firms, is likely to report dismal results due to the closures. Although the rate of new cases in China has dropped dramatically, the economic impact of coronavirus has yet to be quantified. That’s especially true as new cases outside of Asia continue to skyrocket.
Luckin’s Transparency Issues
Another red flag for Luckin investors has been alleged transparency issues. Short seller Muddy Waters published a report in January alleging that Luckin has been fudging its numbers to gain investors favor. The story was apparently unverified, and Luckin has disputed the claims saying they’re completely false.
However, it does cast a shadow of doubt over LK stock. After all, China isn’t exactly known for transparency so whether or not investors are getting the full picture is already a concern. Plus, as a relatively new company that isn’t yet turning a profit, an accurate picture of sales growth is essential from an investment standpoint.
Should the Muddy Waters report give you pause? Of course it should — but so far there’s been no evidence that it’s true.
The Case for Luckin
So why, with all of the risks facing LK stock would investors want to consider the Chinese coffee chain? Because it could be the next Starbucks— and that’s huge. Before the coronavirus threw a wrench into its plans, Luckin was becoming a fast favorite among Chinese consumers.
Luckin’s third quarter results were outstanding. Net revenue was up 557% from the previous year and fourth quarter figures— which shouldn’t include any coronavirus-related pain— are expected to show more of the same. Plus, Luckin’s growing footprint has made it one of the largest coffee shops on the planet. The firm has already outpaced Starbucks (NASDAQ:SBUX) in terms of physical locations.
Another thing that Luckin has going for itself is its focus on creating a successful mobile app. Customers pay online using the app, which helps Luckin keep costs down and get to know its customers better than most restaurants.
Luckin’s strategy has always centered around technology and in today’s day and age data is king no matter the industry. As Luckin operates solely through its app, the firm knows exactly who likes drinking what and when they like to drink it.
The Bottom Line on LK Stock
It’s worth noting that now may not be the time to go out and buy Luckin stock. The market is still stuck in a tailspin that rightfully has investors on the sidelines. More of that is likely over the next few weeks.
Plus Luckin is inherently risky because it isn’t yet turning a profit. In times of economic strain, cash strapped new businesses aren’t exactly safe havens. But the best way to look at LK stock is to decide whether or not you believe in Luckin’s growth story before coronavirus.
That’s because that growth story is likely to continue once the virus panic has lifted. The good thing about coffee is that it represents a low-cost luxury that will likely survive even a severe economic downturn.
As China returns to normalcy, Luckin will likely see its sales pick up once again. Luckin’s focus on data makes it a unique play in the food and beverage space and its position in China is an appealing way investors can capitalize on the nation’s growing middle class.
As of this writing Laura Hoy was long SBUX.
