It’s been nearly a month since Nasdaq delisted Luckin Coffee (OTCMKTS:LKNCY). It was quite the fall from grace for a company that went public only a year earlier.
Luckin stock was one of the most highly anticipated IPOs of 2019. The startup was seemingly growing at a rapid clip, and overtook Starbucks (NASDAQ:SBUX) as the largest coffee chain in China.
But the company’s tremendous growth was largely fabricated, as internal accounting documents later revealed. It came out that the company had inflated its numbers by $300 million and falsified $190 million of expenses.
This led to a public ousting of Luckin’s former chairman, Charles Zhengyao Lu and several other key leaders and employees. But the final straw for Luckin shareholders came when the company was unceremoniously booted from Nasdaq.
After initially requesting a hearing with Nasdaq, the company later filed a statement with the SEC saying it wouldn’t contest its decision to delist the stock.
Luckin stock is currently down more than 93% year to date. The shares were already under pressure from the market crash caused by the coronavirus.
And while the stock is definitely a bargain at current level, now isn’t the time to buy. In fact, if you’re still holding the shares, here are four reasons should sell them.
There’s actually still quite a bit of interest in Luckin stock. The problem is, there’s very little trust in the company’s business model or leadership.
The company tried to inflate their sales and revenue numbers, so it’s unclear how strong the company’s business model actually was … or is. To this day, investors still don’t have a clear picture about Luckin’s fraudulent accounting practices.
It’s hard to make informed investing decisions if you don’t know whether the company is being honest or not.
Hard to Profit
Many people don’t realize that it’s actually not that easy to make a profit selling coffee in China. Chinese consumers drank an average of 5.4 cups per capita in the last year while U.S. consumers gulped 341 cups and Europeans sipped 591.
To be sure, Chinese coffee consumption is growing, but only at a rate of about 5% per year. Chinese consumers prefer tea as their main source of caffeine, and buying a daily coffee just isn’t part of their culture.
Starbucks is one of the few coffee brands that has had major success in China, and it currently controls 80% of the market.
Once Luckin’s scandal came to light, and it became clear the company would be delisted from Nasdaq, the board took steps to remove the company’s founder and chairman. The board also fired the CEO, COO and several employees who were complicit in the scandal.
The board has named Jinyi Guo as the new chairman and CEO of the company. It’s unclear what’s next for the company, or what steps the new leadership team will take to right the ship.
And finally, investing in Luckin stock is a gamble right now because the company’s future is so uncertain. The company no longer has access to the stock market to raise capital, and it still owns 3,680 stores across China.
There have been much speculation about the next steps company management will take. Some expect the company will eventually seek bankruptcy protection while many investors anticipate the company will eventually go private. InvestorPlace contributor Patrick Saunders last week offered an assessment of what such a move might mean for those still holding LKNCY stock.
Bottom Line on Luckin Stock
If there’s anything 2020 has taught us, it’s that a lot can change in a very short period of time. Luckin stock went from being seen as a very real competitor to Starbucks, to losing over 90% of its value in just a few months.
It’s unclear what the future holds for the company. But either way, Luckin stock is just too much of a gamble right now.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.