By now, you’ve probably heard of Luckin Coffee (NASDAQ:LK) as that Chinese company which posed as the Starbucks (NASDAQ:SBUX) of China, but which fabricated a significant portion of its sales and has since turned into a harsh reminder of why all investors should watch the documentary, The China Hustle. Against that backdrop, you might think that LK stock is a must-avoid situation at all costs. After all, de-listing and bankruptcy are very real risks that could be just around the corner.
You may be right. In fact, you are probably right. LK stock is a high-risk stock which should be avoided by any and all risk-adverse investors.
But, for investors who have an appetite for risk, buying LK stock here could prove to be that once-in-a-lifetime contrarian investment that nets you 1,000%+ returns.
Luckin Isn’t a Complete Fraud
Wall Street tends to see the world in black and white. One month, Wall Street saw Luckin Coffee as the hottest company in China, with enormous long-term upside potential in China’s booming retail coffee market. The next month, Wall Street saw Luckin Coffee as nothing more than a fraud.
The truth is somewhere in between.
Yes, Luckin Coffee fabricated a ton of its sales and was being led by a corrupt management team. This company is not growing revenues at a 500%+ year-over-year pace, nor is it the hottest company in China. Instead, it’s staring down the barrel of potentially huge lawsuits, a de-listing, and maybe even a bankruptcy.
But, Luckin still operates more than 6,500 retail coffee locations in China — far more than Starbucks — and is growing that store base at an impressive 10%+ month-over-month pace. The company’s app is presently the seventh most downloaded food and drink app in China. Not too long ago, it was the country’s most downloaded food and drink app. The corrupt management team which fabricated sales has been ousted. Most channel checks imply that the stores are still quite busy.
In other words, Luckin isn’t the hottest company in China. Nor is it a complete fraud. It’s a solid and real business that’s still growing, but which had a bad management team that fabricated sales.
At a $1 billion market-cap, LK stock is being priced as a complete fraud. But, if the company can survive de-listing and bankruptcy risks, LK stock will be worth a whole lot more than $1 billion.
Long-Term Growth and LK Stock
Zooming out, Luckin’s core business model was actually pure genius.
There exists a visible and compelling opportunity for an urban-focused, small, quick-service and digital-centric retail coffee shop to emerge in China and win over the hearts (and wallets) of young, urban Chinese consumers.
That’s because of China’s increasing appetite for coffee coupled with a lack of supply to meet that growing demand.
On the back of rising incomes, urbanization and Westernization, China’s coffee consumption has grown by 16% per year over the past decade. Yet, China consumes only around five cups of coffee per person per year. Finland, by comparison, consumes five cups of coffee per person… per day. To that end, China’s coffee market isn’t just growing quickly today, but also has ample room to sustain huge growth over the next several years.
Starbucks is trying to satisfy this growing demand by dramatically increasing its retail presence in China. But the company isn’t moving with great speed in expanding its retail footprint, and the store has some innate shortcomings in servicing young, urban Chinese consumers (who are driving the coffee boom).
That is, Starbucks’ coffee is typically quite expensive (incomes in China aren’t high), the stores are fairly big (China’s cities are ultra-dense) and it’s not a digital-first business (China has a world-leading e-commerce sales penetration rate).
Therefore, there exists a huge opportunity for another brand to emerge which serves cheap coffee, in small stores, through a digital-first platform.
Luckin was that new brand. The coffee was cheap. The stores were tiny. And everything was built on an “order-online, pick-up-in-store” model.
Of course, thanks to pending lawsuits, the future of Luckin is entirely unclear today. But, if the company can survive the current risks, then Luckin is the best positioned to be the next big retail coffee brand in China, thanks to its already huge retail footprint which is the largest in China by a mile.
Luckin Coffee Stock Back to $30?
It’s nearly impossible to peg a “fair value” for LK stock at the current moment. There are simply too many headline risks, and we don’t really know what the company’s true revenue and margin numbers are yet.
But I’ve made some rough estimations which suggest that, if Luckin Coffee can survive bankruptcy, LK stock could fly back to $20 in a hurry.
Those assumptions are:
- Luckin Coffee pauses store expansion for the time being until headline risks pass. If/once they do, Luckin Coffee resumes its rapid expansion plans and grows to 20,000 stores in China by 2025.
- Unit volumes scale towards $250,000 by 2025, equating to about 25% the unit volume of Starbucks’ stores, which average about $1 million in sales per year.
- Operating margins expand and settle around 15% by 2025, slightly below the high-teens operating margin which Starbucks has operated at for several years.
Under those very basic assumptions, Luckin Coffee could net about $2 in earnings per share by fiscal 2025. Based on a market-average 17-times forward earnings multiple, that implies a 2024 price target for LK stock of $34.
In other words, if Luckin survives bankruptcy — admittedly, a huge “if” — LK stock could soar by 750% over the next four years.
Bottom Line on LK Stock
Avoid LK stock at all costs if you can’t stomach volatility or if you are investing with your lunch money. It’s just not a smart move.
But, for investors willing to play the contrarian, LK stock could be a good buy here. There is a semi-visible opportunity for this company to survive bankruptcy and for the stock to soar by 750% over the next few years.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SBUX.