As most people living outside of Houston know, cheating is wrong. Thus, no matter how cute of an argument a bullish analyst contrives for Luckin Coffee (NASDAQ:LK), it will invariably run into this wall. I will also point out that no matter how many times LK stock has gyrated, it remains one of the worst-performing securities of this year.
Moreover, Luckin is now more dependent than ever on the good graces of American investors. Prior to the novel coronavirus pandemic and Luckin’s horrific accounting scandal, many people bought into the narrative of China transitioning into a coffee-drinking culture. To be fair, this is a legitimate trend, which is why LK stock appealed to those looking to get into the next Starbucks (NASDAQ:SBUX).
And this American icon was exactly what Luckin was targeting. Before anyone knew about the cooked books, optimists marveled at the Chinese upstart’s incredible growth curve. LK was well on its way to becoming an unbelievable success story among initial public offerings.
Of course, the news dropped that the coffee company fabricated $310 million in sales from the second quarter of 2019 until the end of the fiscal year. While some Chinese investors may be willing to forgive Luckin, you’re not going to find that generosity here.
As you know, Americans hate cheaters. According to a Washington Post article, most of us are happy to pay taxes, so long as everyone else pays their fair share. Obviously, we don’t have a history of tolerance toward aristocratic favoritism: rich or poor, everybody contributes.
Just like in baseball, when you break this unspoken contract, there’s hell to pay. With LK stock, “chin music” may come in the form of shunning.
Cheating Could be a Benefit
Clearly, deliberate avoidance is the last thing Luckin needs. If the company wants any hope of returning to some semblance of its former glorious self, it needs credibility.
Despite my severe reservations, I must concede that the case for LK stock isn’t completely without justification. After all, merely saying sorry was more than enough for the Houston Astros. They cheated and totally got away with it.
But that’s just a game. Will investors, American or otherwise, be able to get over this scandal? We’re about to find out. According to a Reuters report, Luckin brought on investment bank Houlihan Lokey (NYSE:HLI) to provide financial and strategic advice. More importantly, Houlihan Lokey has experience working with embattled organizations — though they may have met their match with Wirecard (OtherOTC:WCAGY).
Undoubtedly, this is one of the most challenging cases the investment bank has taken on. However, it’s also an intriguing one in that LK stock is levered to a very compelling business. Two years ago, CBS News reported that coffee consumption in China nearly tripled over a four-year period. This action correlated strongly with the country’s booming middle class.
Freshly armed with resources and social mobility, Chinese consumers want to get a taste of what they’ve been denied for so long. As such, it’s no surprise that Starbucks aggressively positioned itself there. As CBS noted, coffee consumption wasn’t just about the caffeine but the adoption of elements of American and western culture.
Further, this transition to the west resonates very deeply with China’s young, emerging consumer base. By adopting western practices, Chinese customers can distinguish themselves as better educated or progressive than the lay person.
In a country historically known for its tea production, switching to coffee is a big deal; hence, LK stock hasn’t (yet) plummeted to zero.
LK Stock is a Pure Gamble
Yet even this narrative isn’t without problems. For anyone to have confidence in LK stock, they must know what the Chinese consumer is really buying: the platform or the brand?
If the former, I would appreciate the Luckin bull as a daring contrarian. But if the latter, I wouldn’t be so generous with my words. It’s hard to imagine that image-sensitive Chinese consumers will grant equivalency between the Starbucks and Luckin brands.
Therefore, my conclusion is that Luckin stock is a pure gamble. First, you’re betting that prospective buyers will forget about the company’s scandal. Frankly, this is probably impossible, given that the Nasdaq gave LK a delisting notice. It will be a long time before Luckin lives this down, if ever.
Second, we don’t know what the true fundamentals are because obviously, management lied. For the time being, traders can place wagers, hoping that the law of small numbers favors them that day. For everyone else, you’re betting off avoiding this toxic organization.
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.