LK stock is no more. Luckin Coffee (OTCMKTS:LKNCY) was delisted from the Nasdaq Exchange last week. And this may be it for Luckin stock.
From one standpoint, the news is hardly a surprise. The former LK stock was halted for six weeks starting in April, before resuming trading on May 20. The Nasdaq Exchange then submitted two delisting notices last month.
But it seems to have been a surprise that Luckin decided not to appeal. The company’s required Form 20-F likely is a long ways from being filed with the U.S. Securities and Exchange Commission, owing to Luckin’s massive accounting scandal. Still, it could have bought some time.
It chose not to. And so Luckin stock closed out on an ignominious note, dropping 54% on Friday to an all-time low.
With its new over-the-counter listing, the stock has rallied, including a 51% gain last Tuesday. And, at least on paper, I can see the reason for optimism. The company likely has a significant amount of cash remaining. The business isn’t what investors thought it was — but it’s a real business. The nearly 5,000 locations in China aren’t imaginary, after all.
But the delisting itself highlights the core problem here: Investors cannot trust Luckin Coffee. That problem now goes beyond faked revenue. Luckin had a chance to at least give its shareholders a more orderly exit — and passed. Can any investor believe that, going forward, the same company is going to work to drive material, lasting, shareholder value?
The Case for Luckin Stock
It seems almost silly to say that Luckin stock is cheap on paper. After all, it was also “on paper” that the company reported an estimated 2.2 billion RMB more in revenue than it actually generated. Investors would be forgiven for not trusting any of Luckin’s numbers.
Still, it’s possible to make a case for Luckin stock even while retaining a substantial amount of skepticism. For instance, it seems likely that the company has more cash on the balance sheet, even net of debt, than its current market capitalization.
Luckin said that it closed the third quarter of 2019 with $776 million in cash. Most of the cash came from the initial public offering last year. Then, in January, it raised another $865 million, including $450 million face value in debt.
Skeptics would argue that cash, too, could be stolen. But it’s far from guaranteed. The point of the accounting fraud was to inflate revenue — and thus the LK stock price. Cash didn’t need to be taken from the coffers. And that cash didn’t go to China. Luckin — in a setup much like that of Alibaba (NYSE:BABA) and Pinduoduo (NASDAQ:PDD) — is headquartered in the Cayman Islands.
There might be as much as $1 billion on the balance sheet net of debt. There are still thousands of locations and millions of customers. Starbucks (NASDAQ:SBUX) shows a coffee company can make a profit in China.
Yet Luckin Coffee has a market capitalization still under $800 million.
A Matter of Trust
Put another way, the case for LK stock was based on growth. The case for LKNCY stock would be based on value.
But any value case must answer an important question: How will the value be realized? That was a difficult question to answer properly a week ago. Now, it’s close to impossible.
Again, Luckin could have fought the delisting. The appeals process takes time, which could have allowed the company to eventually file the 20-F for 2019. Between the scandal and the pandemic, it’s possible (though far from guaranteed) that Nasdaq would have been patient.
Luckin chose not to do so, leaving its U.S. shareholders out to dry in the process.
So can an investor really believe that this same company is going to aggressively move to create shareholder value any time soon, if ever? Can anyone credibly argue that shareholders are going to get their hands on that $1 billion (about $4 per share) in cash?
I don’t believe the answer to either of those questions is yes. And if it isn’t, then all the math in the world doesn’t really solve anything. The fundamentals might say that LKNCY stock is cheap, but the company’s behavior says that the stock is far from an investment.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.