Last month, I blasted Luckin Coffee (NASDAQ:LK) as the Houston Astros of Wall Street. At the time, I wanted to convey my disgust in the strongest terms possible without using expletives. I thought it was a good description, if I may say so myself. Not only that, I’m sticking to it. LK stock is a disaster, one that most likely doesn’t have a future.
As a quick recap, auditors discovered multiple false transactions that Luckin’s management team concocted that totaled $310 million. As I mentioned earlier, that represented “nearly half of net revenue between the second quarter to Q4 of last year.” Not surprisingly, the Nasdaq exchange halted trading for LK stock, leaving many stakeholders in limbo.
InvestorPlace contributor Chris Markoch suggested that should trading resume, LK stock may quickly plummet to zero. Among the reasons he cited for this bearish outlook, Markoch mentioned that Luckin has no moat. And as competitors like Starbucks (NASDAQ:SBUX) expand their footprint in China, that leaves Luckin with no choice but to raise its pricing model.
Again, this is assuming that LK stock reopens for trading. Right now, I’m not sure if this is politically feasible. What we have here is a situation just as bad as the Enron scandal.
Very briefly, Enron fell into the hot seat when investigators discovered that management used accounting loopholes and other methods to hide massive amounts of debt. Among these “other methods” were outright criminal actions like illegally destroying documents.
With LK stock, we’re not talking about hiding debt, but rather sales fabrication. No matter. Luckin’s actions violated shareholder trust. Worse yet, this scandal has severe geopolitical implications.
China Bashing Gives No Margin for LK Stock
You don’t have to look far to see anti-China sentiment. For one thing, the novel coronavirus originated in China. Further, U.S. officials have made fierce accusations that the Chinese government covered up the scope and contagiousness of the virus in order to hoard medical supplies.
In any other circumstance, you might encounter some pushback, with critics perhaps countering that such accusations reek of xenophobia. But then you have a company like Luckin Coffee, which almost gives the impression that they viewed corporate fraud as no big deal. After all, following the Enron scandal, legislators pushed for the Sarbanes-Oxley Act in a bid to disincentivize white-collar crime.
I think most Americans recognize that communist governments are not trustworthy. But the Luckin controversy has now brought to the forefront an uncomfortable criticism that high-level experts, including those associated with national security have warned about: China has a culture of fraud.
Again, you only need to look at the fact that LK stock isn’t trading right now to reaffirm this point.
Another point to consider is that President Donald Trump’s approval rating has been slightly declining since March. Most of that is tied to his handling of the coronavirus pandemic. Moreover, I don’t think the constant flip-flopping is helping matters. First, the virus was no big deal and later, he endorsed states’ decision to quarantine, even going so far as to criticize Georgia’s reopening – after he previously approved the plan.
With such a political mess amid a real crisis, President Trump probably has few viable options except to bash China. Aggressive words against Mexico helped embolden his conservative base in 2016. He’s hoping to do the same with a different country in 2020.
If so, this is disastrous for LK stock.
Bipartisan Support for Holding China Accountable
What really makes the Luckin scandal ugly – if you didn’t think the above was ugly enough – is the rise of bipartisan support for holding China accountable.
Prior to the coronavirus, this has been difficult to do with China because of how its government aggressively protects its national interests. However, recent legislative action calls for Chinese companies to abide by American laws and regulations if they want access to U.S. capital markets.
On the surface, this is a reasonable request. But that also spells trouble for LK stock as a tradable asset.
Admittedly, legislators must be careful with how they address this situation. Push too hard and China can easily retaliate, which would hurt our already vulnerable economy. This also has domestic political implications.
A possible scenario is for the U.S. government to crack down on the worst offenders, thereby facilitating a road with other (hopefully) legitimate Chinese companies. But that also leaves Luckin Coffee as the scapegoat. Thus, I’m in no hurry to buy LK stock, if it even comes back at all.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.