Investors of Luckin Coffee (NASDAQ:LK) had a lot on their plates this year. Revelations about fraudulent financial reporting practices suspended Luckin stock trading for a month. Top executives were ousted off their positions, and finally, the company’s stock was delisted on June 29.
Luckin stock is down some 4.3% for the month and about 86% year-over-year. The company had initially scheduled a hearing on June 25 to appeal against Nasdaq’s delisting plans but later withdrew the request, pushing itself in the over-the-counter market.
The company recently announced that it was voting out its chairman and co-founder Charles Lu. The path to profitability seems tough, and the additional legal expenses make it no less than a distant dream at this stage.
Let’s assess Luckin’s position in a little more detail to have a clearer understanding of what the future holds for the company.
Changes at the Top
The changes began soon after it was uncovered that the management had fabricated $300 million in sales for its 3,680 stores last year. Luckin stock trading was suspended from Nasdaq, and its owner was investigated for fraud. Luckin’s board went after Lu shortly after the company stock was reinstated on Nasdaq. Internal investigations have unearthed that Lu was ether direct responsible or was aware of the fraudulent activity.
Lu was recently ousted from his position, along with four other executives. The company announced that its acting CEO, Jinyi Guo, will take the permanent spot and will also be chairman. Two additional members were also appointed to the board.
However, a lot of controversy surrounds these changes. Even though Lu left his position, he was instrumental in appointing the directors who would replace him and his colleagues. Therefore, a lot of uncertainty exists at this time, and the lack of transparency will negatively impact the business for the foreseeable future.
Luckin Stock Will Probably Go Private
Chinese stocks have been struggling at the stock market for quite a while now, and some investors believe that a lot of them are undervalued. Naturally, for such companies, the best course of option is to offer for a buyout.
U.S. lawmakers have been on their case for a long time, which is another incentive to go private.
Chinese internet company Sina Corp recently announced that it would be going private, and I expect more to follow suit. A lot of Chinese companies have made relatively cheap buyout offers to go private and turned around and done IPOs within China or Hong Kong at higher valuations.
Luckin could potentially have the same fate and find it best to go private at this point. Speculative activity continues to push Luckin stock price higher. Since its delisting, it has gained 93.5% in the over-the-counter market.
Luckin does not have a clear path toward profitability based on the corrected information. Per store, productivity has shown little progress compared to the rapidly growing store count. If the company limits expansion plans, it could potentially reduce cash burn to roughly $350 million per year, but legal expenses will add to that.
The company does, however, have a lot of cash in hand, reported at $700 million at the end of the third quarter of 2019. Luckin took in $865 million from its equity and convertible loan notes in early 2020.
However, I don’t feel that Luckin stock is worth a gamble at this stage. It has too many things going against it, and the controversy surrounding its C-suite changes adds to that.
Final Word on Luckin Stock
A recovery for Luckin stock seems unlikely at this point. Speculative investors feel that a bullish case exists for Luckin, but I highly doubt it considering the controversy surrounding its recent c-suite changes.
On top of that, the company’s one-dimensional business model has been exposed with the corrected financial information it posted recently. Hence, avoid Luckin stock at all costs.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.