[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 (NASDAQ:LK) stock is well-positioned to benefit from the return to work of the lion’s share of China’s citizens. Further, the company’s business model and the initiatives it has undertaken should enable it to benefit from the current environment in China. That’s why it’s worth a look here.
As of March 10, demand for coal for power generation was 20% lower than during the same time of the year in 2019, according to Bloomberg. Moreover, “the economy was likely running at 70% to 80% capacity last week,” the news service reported. Both data points indicate that most of China’s companies are operating at 70%-80% of their capacity, implying that most of the country’s workers have returned to their jobs.
In my experience, people usually drink the most coffee when they’re trying to become less sleepy and more productive at work. Therefore, Luckin’s sales should be significantly boosted by the apparent return of a majority of Chinese citizens to work.
Luckin’s Business Model and Initiatives Leave It Well-Positioned
Luckin’s customers order and pay for the company’s coffee via the company’s mobile app. They then either have its coffee delivered to them or pick it up at one of the company’s stores. At a time when many Chinese consumers are likely still worried about catching coronavirus, getting coffee delivered seems like a safer option than actually going to a coffee shop.
After all, while in a coffee shop, a customer can be physically close to many people. Conversely, when getting coffee delivered, a customer only has to come near Luckin’s employee who delivered it. And the customer can stay a few feet away from the delivery person during the encounter.
Luckin’s customers who pay for their coffee on the company’s app and then pick up their drinks also don’t have to come too close to anyone; they can ask for their drinks from a safe distance and then pick it up after an employee has put it on the counter and moved away from the area. As a result, it should be able to take market share from coffee shops that don’t have mobile apps and delivery people.
Even better, as I noted in a column published on Jan. 23, Luckin in January launched “smart coffee machines” and “smart vending machines.” Further, some of its machines will not only contain beverages, but snacks as well. People who use the vending machines will not have to interact with any other human beings. And at a time when many Chinese citizens are still reluctant to go to grocery stores, the snacks in Luckin’s vending machines could become tremendously popular.
Moreover, Luckin has started selling “alcohol-based sterilizers and antibiotic hand soap” in its vending machines. I believe that many of the people who buy drinks and food from the machines will also purchase sterilizers and hand soap.
Analysts Remain Upbeat on Luckin
Despite the coronavirus outbreak, analysts remain upbeat on LK stock. Their average rating on the stock is “buy,” and their average target on the shares is $49.18., well above the stock’s current price.
In early February, one bullish analyst, Needham’s Vincent Yu, was upbeat on the company’s tea stores and its vending machines. According to Yu, the vending machines will enable the company to penetrate new markets and increase awareness of its brand in areas in which it does not have stores. He raised his price target on the shares to $40 from $27.
The Bottom Line on LK Stock
Given the huge number of stores that Luckin has and its tremendous growth, the company’s value will likely eventually be many times higher than the stock’s current market cap of $8 billion. As a result, its shares will eventually climb a great deal And that means long-term investors should buy LK stock.
As of this writing, Larry Ramer owns shares of Luckin stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
