At this point, Wall Street is focusing only on the problems of Luckin (NASDAQ:LK) and LK stock and ignoring its potential. Investors are also acting as if the Chinese company will probably have to throw in the towel and sell all of its assets at low prices.
But the road ahead for Luckin will not necessarily be completely filled with doom and gloom. I believe that, if the company hires a new, superb CEO with a great track record and alters its product mix, it can make one of the greatest comebacks of all time.
Improprieties Are Not Necessarily the End
Investors are acting as though Luckin’s cheating will ruin it. But the fact is that other companies have survived and even thrived after their employees “cooked the books.” Kraft Heinz (NASDAQ:KHC), Marvell Technology (NASDAQ:MRVL) and Wells Fargo (NYSE:WFC) come to mind.
Kraft Heinz had to “restate its financial statements for 2016 and 2017 by $181 million, after a review into its procurement and accounting procedures discovered employee misconduct,” CNBC reported. In 2016, Marvell Technology reported that “some [of its] revenue was recognized prematurely,” according to the Wall Street Journal. At Wells Fargo, employees created fraudulent accounts in the names of customers who did not know about or want the accounts.
Since their scandals, the track records of each company’s stocks has been mixed, but mostly positive. Before the coronavirus crisis hit, Wells Fargo had rallied nearly 25% from the low point it reached in 2016. Kraft Heinz is still nearly 70% off its 2017 highs and has never rallied much off its lows. Still, its shares have stabilized in the last year. Marvell Technology is now over 500% above the low it reached following the discovery of its scandal in 2006 and is close to the all-time high it achieved earlier that year. By 2009, it had more than tripled off its low.
It’s true that none of the American companies’ top executives was found to have been directly responsible for their scandals, while Luckin’s former COO, who has since been fired, was apparently the mastermind of its wrongdoing. Moreover, as a Chinese company, Luckin is facing more distrust than Wells, Kraft Heinz and Marvell ever had to contend with. And last but not least, Luckin’s cheating did inflate its results much more than Marvell, Kraft and Wells.
But on the other hand, Luckin is not really similar to the most famous companies that were totally ruined by cheating over the last 20 years. Specifically, unlike Enron and Bernie Madoff’s firm, Luckin’s whole business is not based on fraud and it does appear to have fairly strong legitimate sales and valuable assets, i.e., its stores and its brand, which do not seem to have suffered much in the eyes of Chinese consumers.
How Luckin Can Make a Comeback
Luckin appears to have two main problems at this point: investors and Wall Street don’t trust it, and its product mix is not sufficiently attractive to consumers. To remedy the first problem, Luckin should bring in a CEO with a great track record from a company that’s trusted and respected by Americans. Perhaps Luckin can recruit a former head of Starbucks’ (NASDAQ:SBUX) China business to take the job or even Dunkin Brands’ (NASDAQ:DNKN) COO. Other possibilities include top executives from Yum China (NYSE:YUMC) and someone form the C-suite of a Japanese consumer company. Ideally, Luckin’s new CEO would immediately hire a new CFO and a top-notch, highly respected auditor.
After reviewing a Seeking Alpha columnist’s analysis of the company’s finances, I think it’s clear that Luckin’s two main problems were that it could not charge enough for its coffee to become profitable and that it opened too many stores. Starbucks is profitable in China because it charges three times as much as Luckin for its coffee. But every time Luckin tried to raise the prices of its coffee, demand for its beverages fell.
I believe that Luckin could solve the problem by signing a product licensing deal with a Western company like Dunkin Donuts, which has only 16 stores in China, or Nestle (OTCMKTS:NSRGY). Such a deal would likely enable Luckin to charge 50% or 75% as much as Starbucks. As a result, Luckin could approach profitability, lifting LK stock in the process.
Meanwhile, the company could further develop its new tea offerings. Since tea is much more popular than coffee in China, it will likely be much easier for Luckin to attract strong demand for its tea than its coffee. Moreover, I still believe that the company’s vending machines can prove to be popular at a time during the coronavirus pandemic, when many citizens may like the idea of avoiding face-to-face interactions with other people.
The Bottom Line on LK Stock
Other companies have gone on to do pretty well after accounting scandals, and I think Luckin could potentially follow in their footsteps if it follows the strategies I outlined above. Given the shares’ very low price at this point, LK stock could theoretically jump tremendously in a year or two if it follows that path and executes well.
But only risk-tolerant, growth-oriented investors should take a chance on the shares. And I think those who don’t yet own the stock should wait until the company names a new CEO before buying the shares. If the company names a CEO with a great history whom the market trust, I believe the shares will be worth buying because Luckin will have a good shot to come roaring back.
As of this writing, Larry Ramer owned shares of Luckin. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.