Battered Luckin Coffee (OTCMKTS:LKNCY) stock is trading at a bare fraction from what it was when it was listed on the Nasdaq composite. The corporate accounting scandal left Luckin stock battered and bruised.
But, hold on a second. Is there an opportunity here for speculative investors?
Remember, Luckin has an enormous footprint in a huge market. China’s economy, while not the powerhouse from five years ago, is still a robust growth opportunity with a GDP that was growing faster than the U.S., even before the novel coronavirus.
Even if Luckin Coffee eventually goes private, there may be some room for profits for investors who are holding Luckin stock.
You just have to decide if the risks of investing in a tarnished name is worth the potential should Luckin manage to right the ship.
The Sad, Sorted History of Luckin Stock
Luckin used to be a high-flyer stock. Trading under the ticker LK on the Nasdaq composite, the Xiamen-based company had its IPO in May 2019 at $17 per share.
By the fourth quarter of that year, shares were skyrocketing higher on the strength of powerful sales numbers. The company rapidly expanded to 4,000 locations in China, and the stock briefly touched $50 per share in January.
It seemed clear why Luckin stock was the “Starbucks (NASDAQ:SBUX) of China.”
Then the bottom fell. Short-seller Muddy Waters circulated an 89-page online report that accused Luckin of fraud, calling the company “a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers through cutthroat discounts and free giveaway coffee.”
The report accused Luckin of faking its sales numbers to trigger the rise in stock price. And when the damning report was released, with all its evidence attached, the price of Luckin stock plummeted.
Nasdaq suspended trading of Luckin in April and the company was forced to launch its own investigation, in which it confirmed revenue fraud of $300 million. It confessed to inflating revenues in the second quarter of 2019 by $35 million; Q3 revenue by $99 million; and fourth-quarter revenue by nearly $166 million.
Chairman Charles Lu and three members of the board were fired, although there’s speculation that Lu engineered his own dismissal to take some heat off himself while criminal probes by Chinese and U.S. authorities continue.
Where Does Luckin Stock Stand Now?
Luckin stock began trading again, on the over-the-counter markets, on June 29. The price is mostly unchanged since, right around $2.50 per share.
The company says in a filing with the Security and Exchange Commission that it had $780 million in cash on hand, much of which was derived from its IPO and a convertible bond sale.
If you can believe those numbers – and it’s a big if considering those numbers haven’t been audited – then Luckin could have enough capital to begin staging a comeback.
But interest among investors in Luckin stock remains high. Even trading on the pink sheets, Luckin is seeing trading volume in excess of 10 million shares per day.
There’s some speculation that the reconstituted Luckin board will try to take the company private. That’s a move that several Chinese companies are reportedly making, with the idea of then doing IPOs in China or Hong Kong for a higher valuation.
For example, Sina (NASDAQ:SINA), a Chinese internet company, announced recently that it would go private with the buyout offer coming through its CEO through a controlled entity. The $2.7 billion deal would be at a 12% premium for Sina stock, giving investors of record a tidy profit.
Speculative investors could pick up Luckin stock on the cheap now in hopes that the board will take Luckin private and launch a new IPO in Hong Kong, where it can get a fresh start while also keeping away from pesky U.S. oversight.
Another option for investors is convertible bonds. Luckin sold $400 million of convertible debt in January at a par price of $1,000, but it’s trading for pennies on the dollar. InvestorPlace colleague Mark Hake laid out the pros and cons of buying the Luckin convertible.
The Bottom Line for Luckin
The biggest problem with Luckin stock is trust, or the lack of it. The company tried to supercharge the coffee-drinking culture in China by offering tons of freebies and discounts and then baked the books to make it appear that sales numbers were better than they really are.
While we know that China is a growing coffee market – Starbucks has made some serious investments there – we have no idea if its customers are really that into Luckin, or if they’ll be willing to keep drinking coffee drinks without the freebies.
And we have no idea if we’ll be able to trust Luckin’s sales numbers going forward.
For speculative investors looking to for an alternative to Starbucks in an emerging market, Luckin is an interesting play. But any investment you make here is a shot in the dark, at best.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.