[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.]
Luckin Coffee (NASDAQ:LK) has become quite the controversial stock. But through that controversy, opportunity may have arisen.
With its immense revenue growth and large target market in China, Luckin stock was exploding higher. However, volatility surged after a short report from Muddy Waters caused a rapid selloff.
The stock had its defenders — including, somewhat ironically, notable short-seller Citron Research — and quickly found buyers. Luckin Coffee stock has held up well amid the market’s recent onslaught.
Getting a Grip
Luckin Coffee has used China to fuel its revenue growth. Starbucks (NASDAQ:SBUX), which is becoming attractive for long-term investors, laid out its growth plan several years ago in China, which included building 500 stores a year.
It’s not clear if Starbucks had planned on a company like Luckin coming along, but clearly that management team knew the opportunity in China. For most U.S. investors, getting a feel for Luckin Coffee is difficult. After all, most of us do not visit China.
Analysts forecast that LK stock will generate fiscal 2019 revenue of roughly $744 million. That’s up massively from the $128 million in sales from 2018. With coronavirus wreaking havoc on China (and the world), looking at forward estimates feels somewhat trivial. But as it stands, analysts expect just over $2 billion in sales for fiscal 2020.
That may not come to fruition given how the virus is unfolding. However, it highlights just how impressive the growth profile is for LK stock once the dust settles. While there will be short-term bumps in the road, the long-term theme looks strong for Luckin.
What About Covid-19?
The bad news? The coronavirus is still sweeping across the globe, infecting almost 200,000 as of March 17 and killing more than 7,500. The media has made it out to be the plague, and while I’m not trying to downplay the impact it has had, the virus is beatable.
China has proven as much. The country logged roughly 80,000 coronavirus cases, but has seen the virus’s growth rate level off tremendously. The country is now getting back to normal, which shows it’s possible for other countries to do so as well.
Granted, China can be a little more “strict” with its quarantines than a country like the U.S., but it still underscores that the situation should improve in the future. With China getting back to normal, that’s good new for Luckin Coffee.
The sooner we get back to normal, the better. However, with LK stock trading in the U.S., it’s still at risk from short-sighted investors. For now, the stock is holding up over key support, as shown below.
Click to Enlarge
The $28 mark was a breakout level in November and has acted as support since. Even when the short-report hammered LK stock, $28 stepped in as support.
Now, the 200-day moving average is in play near $27 as well.
One could argue that bulls now have a reasonable risk/reward with support nearby. Should panic selling occur, look for a possible buying opportunity near $18.
The stock topped $50 earlier this year, with many long-term investors looking at this point as a possible price target in the future.
Bottom Line on LK Stock
Is Covid-19 still a risk to LK stock? Of course. Further spreading in China is possible and as the world panics, Luckin stock could be negatively impacted. For long-term investors though that may be the buying opportunity they are looking for.
Additionally, while Luckin is pivoting toward break-even operations, it’s not yet profitable or free cash flow positive. A big part of that is due to the company’s rapid expansion. For long-term investors, that’s what you want to see in a company like Luckin.
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.
