Luckin Coffee (NASDAQ:LK) stock was supposed to be the Starbucks (NASDAQ:SBUX) of China.
In fact, at one point, the company could do no wrong. Investors cheered as LK stock raced from a May 2019 low of $13.71 to a 2020 high of $51.38.
Luckin Coffee kept surprising investors with revenue and sales growth. It was all going so well. That was, until short sellers uncovered the devastating truth that growth was all an illusion.
Since then, trading of LK stock has been halted. It’s trying to get its house back in order, and there are hopes shares can open for trading again soon. However, even if that happens, I’d stay far away until the books are cleaned and trust is rebuilt.
Luckin Coffee Needs to Get Its House in Order
When allegations surfaced the company fabricated financial numbers, the company was quick to claim the report was “meritless.”
“Luckin Coffee firmly stands by its business model and is confident in benefiting from the strong growth of China’s coffee market in the future. Luckin Coffee’s pioneering business model has enabled the Company to become the leading and fastest growing player driving coffee consumption in China.”
Meanwhile, as investors were cheering growth, company insiders were truly inflating revenue.
In fact, in March 2020, a special committee found that COO Jian Liu and several employees fabricated sales by about $310 million. However, the COO may just be taking the fall for everyone else.
In fact, “he hasn’t got a clear motive,” says TechNode’s Michael Norris. “… Chairman Lu Zhengyao and CEO Qian Zhiya, on the other hand, have more skin in the game than a sumo wrestler. Luckin’s initial prospectus reported that Chairman Lu Zhengyao owned 30.53%, an investment fund owned by Lu’s sister (yes, you read that right) owned 12.4%, and CEO Qian Zhiya owned 19.6%.”
Luckin Coffee Will Continue Operations
Luckin Coffee’s fall from grace has certainly been dramatic.
However, if the coffee company can get its house in order, there’s plenty of demand, and a multi-billion opportunity waiting for it. For one, even after fabricating $310 million in revenue, it’s still operating. Luckin Coffee says demand for its coffee app is surging. It’s now the second most popular in China.
At the same time, the company is trying to clean up its act. Not only is it cooperating with regulatory agencies in the U.S. and in China, it just fired CEO Jenny Zhiya Qian and COO Jian Liu as it dives deeper into internal investigations.
We also have to remember that coffee is in high demand in China. For one, China is one of the largest growing markets for the coffee shop industry, according to the Direct China Chamber of Commerce. China also expects to surpass the U.S. as coffee chains’ biggest market. And, according to Statista, revenue in the coffee segment is up to $7.2 billion this year, and could grow at a CAGR of nearly 14% through 2025.
Again, if Luckin Coffee can get its house in order, it could easily see a multi-billion-dollar opportunity.
The Bottom Line on LK Stock
There were plenty of shenanigans behind the scenes. Allegations of fraud, fabricated sales of $310 million and plenty of lies sunk the stock. There’s no clear indication of when LK stock will resume trading.
However, while there are plenty of negatives, if the company can get its house in order, there’s a substantial multi-billion-dollar opportunity here.
Remember, according to Statista, revenue in the coffee segment is up to $7.2 billion this year, and could grow at a CAGR of nearly 14% through 2025. Once the smoke clears here, and this mess becomes a distant bad memory, LK stock will be worth a buy.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
