[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.]
The novel coronavirus has thus far been a terrible pandemic. It has killed thousands, infected hundreds of thousands and panicked billions. That panic has led to a steep decline in equity markets, as well as individual stocks like Luckin Coffee (NASDAQ:LK). LK stock is currently down 48.8% from its highs.
However, there is a silver lining. While bulls obviously wouldn’t root for a global pandemic, the plus side here is that investors get an opportunity to buy quality stocks at a discount. In the case of LK stock, shares have been cut in half from the highs and more downside could be in store in the short term.
If that’s the case, investors need to do the opposite of what their emotions are telling them. That emotion is fear, and it clouds investors’ judgement and causes panic.
Panic-selling one’s stocks will likely only lead to regret. Maybe not next week or next month, but check back in a year from now and see what you think about selling low.
Luckin Is a Growth Machine
Luckin Coffee is a China-based coffee chain growing like crazy. There’s a reason why Starbucks (NASDAQ:SBUX) began opening 500 stores a year in China a few years ago, as there is clearly opportunity. That’s in a country with a population reaching 1.4 billion and a booming middle class.
In that scenario, there’s obviously room for more players and Luckin Coffee has become a go-to option.
Let’s look at analysts’ estimates, with full knowledge that the coronavirus makes it very difficult to know how accurate the expectations for 2020 are. To those wondering why I’m highlighting potentially inaccurate estimates, it’s to show just how fast this company is growing, regardless of what the final results end up being.
Luckin still has to report its fourth-quarter results for 2019. However, in-line results would ultimately generate about $732 million in full-year revenue. That’s up big from just $128 million in sales in 2018. For 2020, analysts expect sales of $1.98 billion, which would be a 170% increase from 2019 if Luckin can achieve it. Wall Street also expects the coffee chain to swing toward break-even operation in 2020.
The point here isn’t whether Luckin can grow revenue 150% or 190% in 2020. It’s that the growth opportunity here is massive and the runway is measured in years (and potentially decades), not in months or quarters.
Realize that this is a growth stock operating in a big-opportunity country looking to swing toward profitability. The fact that LK stock is down almost 50% from the highs should excite investors, not scare them.
With that being said, there are obvious risks in LK stock. First, the company operates out of China, which was the initial epicenter of the coronavirus outbreak. That had an obvious negative impact on business this quarter and will likely hurt next quarter as well.
Beyond calendar Q2 though, the impact is unknown. Unfortunately, lost revenue is lost revenue in this case. A customer isn’t going to come back in April and buy two cups of coffee instead of one because they couldn’t come to Luckin in March. Further, we don’t know what risks lie beyond Q2 or how long Covid-19 will persist.
So there is certainly short-term risk and potentially intermediate-term risk depending on how long the coronavirus lasts. Beyond that, LK stock faces risk in the stock market based on higher volatility.
Should the markets throw another tantrum and revisit the lows, LK stock could take a hit too.
Luckin Coffee isn’t profitable or free cash flow positive yet. That’s because — as you can see by its revenue growth — the company is investing heavily in its business. With so much growth clearly present, why wouldn’t it invest back in the business?
Don’t Miss Out on This Growth Opportunity
LK stock is trading on a day-by-day basis, but the Luckin Coffee story should be measured in years. In other words, investors who can scoop up this stock at a discount and hold it until the current pandemonium subsides should be very happy down the road.
Let’s see if bulls are lucky enough to nab LK stock below $20 per share.
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.