Trouble’s Brewing for Luckin Coffee Stock

“Scandal” is one of those words that should scare any prospective investor away from buying a stock. “Delisting” is another such word. And tragically enough, both of those words are associated with Luckin Coffee (NASDAQ:LK) stock.

LK Stock: Trouble's Brewing for Luckin Coffee
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It’s fine to want to buy when there’s blood on the streets, as the old saying goes. But there’s a vast difference between a buying opportunity in a solid company and a one-way trip on a sinking ship.

It’s a real shame because Luckin was once touted as the Chinese Starbucks (NASDAQ:SBUX). But Starbucks never had the types of problems that Luckin’s been dealing with lately.

LK stock probably won’t recover, but at least investors might learn a lesson or two from this.

The First Bombshell Hits

So, where to begin with this hot mess of a company? Perhaps the best place to pick up the story is in early April, when Luckin Coffee fabricated transactions and inflated the company’s sales figures.

This was reported in Luckin’s news release, so it’s more than just an allegation or hearsay. The falsifications persisted for quite a while, from April 1 through Sept. 30.

And it wasn’t just a handful of fudged figures, either. Luckin’s internal investigation uncovered 2.2 billion yuan ($307.3 million) worth of fake sales.

To put this in perspective, consider that Luckin had reported 2.4 billion yuan in net revenues during last year’s second and third quarters. Thus, it’s possible that the equivalent of two full quarters’ worth of revenues were entirely fabricated.

To make matters even worse, it was none other than the company’s chief operating officer, Jian Liu, who allegedly fabricated the transactions. And if the company has dishonest dealings going on at the corporate level, it’s hard to place any trust in Luckin at all.

Outsized stock-price drops are often overdone and due for a bounce-back. In the case of LK stock, however, the ensuing 8o% price plunge may have been fully justified.

Luckin’s Luck Runs Out

There have been plenty of corporate-level scandals and yet, many companies have made it through to the other side. With a bit of luck and a whole lot of forgiving and forgetting, some traders might even see a bright future for Luckin.

That’s a nice thought, but it’s not realistic. And in Luckin’s case, one bombshell led to another, and then still another.

To begin with, Luckin cleaned house by firing not only Liu but also the head honcho, CEO Jenny Zhiya Qian. That might have been a necessary purging, but it looks terrible and the reputational damage won’t likely subside anytime soon.

At around that same time, a flurry of unfortunate events befell Luckin and its hapless shareholders. From April 7 to May 20, trading on LK stock was halted. Naturally, analysts and financial commentators had a field day, or perhaps more accurately a field month-and-a-half.

On May 19, the Nasdaq exchange issued Luckin a delisting notice. The share price, once it resumed trading, was halved within a couple of trading sessions.

By late May, a bill aiming to kick a number of Chinese companies off of U.S. stock exchanges picked up steam in Congress. As you might imagine, Luckin is an obvious target of this potential legislation. Indeed, the company might actually be the inspiration for the bill to some extent.

That should be more than enough punishment, but here’s one more tidbit for you. It was recently announced that a group of banks plans to liquidate some of Luckin Coffee Chairman Charles Zhengyao Lu’s assets. More specifically, they’re going after Lu’s privately held company, Haode Investments.

The Takeaway on LK Stock

There’s no silver lining here, folks. No rainbow after the storm, no bomb shelter for all these bombshells. LK stock shares are dead money and, before the year is over, you won’t even be able to buy a cup of coffee with them.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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