Luckin Coffee (NASDAQ:LK) is one of the most infamous stocks of the year. The scandal that caused LK stock to plummet has essentially put all Chinese companies listed on U.S. stock exchanges in the firing line of the US government.
I wrote about Luckin Coffee’s dire position last month, and since then things have continued to roll downhill for Luckin, as Nasdaq confirmed that it had decided to delist the firm’s shares.
Still, LK stock is still well above its 52-week low of $1.33, indicating that the bulls still have some hope for the company. Though a bullish case for Luckin could still be made, it would probably be far-fetched at this point. Let’s dive a little deeper into the company’s current positioning and its future.
Nasdaq’s Delisting Notice
Luckin recently revealed that it had received a second written notice from Nasdaq saying that the exchange had decided to delist its shares. There are two primary reasons behind the decision: public interest concerns, and the company’s failure to disclose its financial information in a timely way.
Once the stock is delisted, it will trade on the OTC market, which has significantly lower liquidity than Nasdaq. The resulting drop in the daily trading volume of LK stock will probably make it extremely tough for its owners to liquidate their investments.
The Bullish Case on Luckin Stock
As crazy as it may sound at this point, there could potentially be a bullish case on LK stock if the company follows the advice I will outline below.
Perhaps the first and most apparent aspect for the company to focus on is restoring investors’ confidence in it. Its accounting scandal has destroyed that. One of the key members of the company’s audit committee, Tianruo Pu, recently resigned, leaving behind only two other members.
Losing key executives has been a significant distraction; Luckin needs to find new leadership that will steer it in a new direction. Speaking of a new direction, I talked extensively about the company’s business model and how it cannot compete with Starbucks (NASDAQ:SBUX), which it hopes to emulate. Luckin needs to revamp its one-dimensional business model, which is easily replicable at this point. Its “cheap, cheaper, cheapest” strategy is unsustainable and has to be changed.
Luckin Coffee’s Future
There are a lot of questions surrounding the company’s future. The company itself has told investors not to rely on its financial statements and earnings releases for the nine months that ended last September 30, as well as the quarterly reports that it issued in April and July 2019.
Therefore, we cannot draw any conclusions from its financial statements. Luckin also announced that it would delay publishing its annual report due to the Covid-19 pandemic.
Recently, The Grand Court of the Cayman Islands ruled that banks, including Credit Suisse (NYSE:CS), can liquidate the holdings belonging to Luckin’s chairman, Charles Lu, after he defaulted on a $324 million margin loan facility.
Therefore, the future looks bleak for the company at this point as the bad news continues to flow.
A Final Word on LK Stock
Things continue to get tougher for Luckin Coffee with every passing day. The accounting scandal has obliterated its reputation in the eyes of foreign investors. Moreover, the company’s initial response has complicated things further.
If it can change its strategy and bring fresh perspectives into its c-suite, then it could mount a recovery. However, all that is hypothetical at this stage, as the stock is a definite sell at this point.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.