With a good deal of chaos priced into Luckin Coffee (NASDAQ:LK) stock, I put my neck on the line, and argued, “Don’t count Luckin Coffee stock out just yet.” That was on May 14 with trading on the stock still halted.
Arguably, it wasn’t one of the best calls I’ve made.
After all, the company committed accounting fraud after scheming to produce millions of dollars in fictional revenue. Then, it was uncovered that Luckin Chairman Charles Lu allegedly sent an e-mail to employees, telling them to commit fraudulent acts.
The company was also facing delisting from the Nasdaq composite. However, no delisting happened. Instead, the stock exploded after reopening at $2.52 on May 20 to a current price of $3.82.
So, perhaps it wasn’t a bad contrarian call after all.
Barring any further internal exposures or chaos, Luckin Coffee could recover lost ground here. Granted, it’ll take some time for a full recovery, but it appears most of the chaos is priced in. I also believe that – with patience – the stock could at least double.
LK Is Still Seeing Strong Coffee Demand
At the moment, the company has 6,500 locations scattered all over China, which is far more than Starbucks (NASDAQ:SBUX). Chinese locals are in full support of the company, as they flood Luckin Coffee stores with orders after a free-coffee coupon.
Granted, the company needs to dig itself out of a hole thanks to fraud issues, but we can’t argue with the demand for coffee, or the company’s expansion efforts. Better, according to Direct China Chamber of Commerce, “China continues to be one of the largest growing markets for the coffee shop industry.”
Even more impressive, coffee delivery app users just in China have grown 75%.
Fear Has Been Priced Into LK Stock
What we have to consider here is that the fraud is priced in. The fear of delisting has been priced in, as it continues to trade on the Nasdaq composite. Those responsible for the fraud have been kicked to the curb and fired. At the same time, we have a company with solid growth.
Plus, as InvestorPlace contributor Luke Lango points out, “if Luckin survives bankruptcy — admittedly, a huge “if” — LK stock could soar by 750% over the next four years.”
At the same time, there are rumors Luckin Coffee could be a potential buyout target.
In fact, according to Reuters, “Its brand may be toxic, but some of its assets – and ideas – will be of interest to Yum China (NYSE:YUMC), Tim Hortons or homegrown Heytea. With deeper pockets, these rivals could present an even more formidable challenge to $91 billion Starbucks.”
With a few bullish near-term catalysts, the company needs to satisfy Nasdaq to keep from getting delisted. After all, if it can stay a listed stock, despite the chaos, it would go a long way in reestablishing trust in the company. We’ll hear more about the potential for delisting when the company pleads its case before the powers that be.
The Bottom Line on Luckin Coffee
We all know Luckin Coffee made an absolute mess. In an effort to inflate the stock, the company inflated numbers, got caught, and watched the stock fizzle.
However, much of the chaos has now been priced in. The company has more stores in China, than Starbucks. Coffee demand is skyrocketing in the region.
Now, if they can stay listed by Nasdaq, and regain some of the lost trust, I believe the Luckin Coffee stock could at least double from current prices. It’ll be a bumpy ride near-term, but patience could pay off well.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.