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Why Now May Be the Time to Buy Disgraced Luckin Stock

Once upon a time, Luckin Coffee (OTCMKTS:LKNCY) was going to take over the world. But things have changed for Luckin stock.

Four Luckin Coffee (LK) coffee cups are arranged in a row.
Source: Keitma /

Hyped up as the rising Starbucks (NASDAQ:SBUX) of China, Luckin Coffee was opening hundreds of small, tech-forward coffee shops every quarter across China in 2019, riding secular Chinese coffee consumption tailwinds to the tune of consistent triple-digit revenue growth and huge gains in Luckin stock – which, throughout 2019, traded on the Nasdaq composite under LK stock.

The Luckin growth narrative has since become the stuff of infamy.

As it turns out, Luckin’s management team significantly overstated revenues in 2019 through thousands of fabricated transactions. Luckin stock was delisted from the Nasdaq, and now trades under LKNCY stock (it’s never good when your ticker adds a “Y” at the end).

The delisting didn’t come before shareholders were almost entirely wiped out, with Luckin stock dropping from $50 highs in early January 2020, to less than a buck in late June.

Most investors are now running away from Luckin stock like it’s the Black Death.

But I think contrarians running towards the stock during these turbulent times and buying the dip will actually win in the long run.

Here’s why.

Fraudulent, but Not Make-Believe

For many investors, Luckin Coffee is a harsh reminder of why everyone needs to watch The China Hustle a documentary detailing how Chinese companies can sometimes be completely fake and entirely worthless.

But, let’s not conflate issues. Luckin Coffee is not that.

Luckin Coffee had a few bad actors. The CEO, the COO, the chairman and multiple reporting employees. Those bad actors made up thousands of transactions, inflated 2019 revenues by about 70% and made it seem like Luckin Coffee was growing far faster than it was.

But, while those bad actors reported fraudulent sales, Luckin Coffee is not a make-believe company.

Luckin Coffee is a very real company. With real coffee houses – about 6,500 coffee stores in China, which is roughly 2,000 more than Starbucks and makes Luckin the biggest coffee house operator in China. The company also has real customers, who continue to download Luckin’s app with great frequency and keep it as one of the top five most downloaded food and drink apps in China, according to App Annie.

Revenues this year will still be about $430 million, up more than 250% year-over-year. The company still operates in a booming Chinese coffee market, with rising consumption tailwinds and huge untapped demand. Luckin also still employs an interesting business model which leverages a small footprint and technology to gain access in busy, dense Chinese urban centers.

In other words, while Luckin Coffee is still a good growth business.

The Turnaround Is Here

The bull thesis on Luckin stock goes something like this.

The worst of the accounting scandal is in the rear-view mirror. That is, those responsible for the fraudulent sales have been given the boot. The company’s internal investigation into the matter has wrapped up. We now have solid, fact-checked 2019 numbers to go off of. And, Luckin stock has already been delisted from the Nasdaq.

In other words, all the bad has already happened.

What happens now? Back to business as usual – and that’s a good thing, because prior to this scandal, business for Luckin Coffee was very good.

New management will come in. They will continue to rapidly expand the company’s store base in China, and push forward on establishing Luckin as a youth-centric, urban Starbucks of China, at a time when coffee consumption in the country is soaring. Luckin’s sales will grow. Profit margins will improve with scale. And the growth narrative will come back to life.

As all that happens, Luckin stock will bounce back.

Huge Long-Term Growth Potential

My numbers indicate that Luckin stock could end the decade up nearly 25x from where shares currently trade.

The math is pretty simple. Based on new numbers, Luckin did about $430 million in 2019 sales. Average revenue per store was $130,000. Starbucks does about $1.6 million per Americas company-owned store, and $900,000 per international company-owned store. But Starbucks stores are roughly 1,750 square feet on average, or almost five-fold that of Luckin’s average store size of 400 square feet.

Given Luckin’s innovative order-ahead, pick-up-in-store model and app-first sales approach, it seems likely that Luckin roughly matches Starbucks’ international stores on a sales per square foot basis. Assuming so, then you’re talking about $200,000-plus in sales per store at scale.

Luckin currently operates 6,500 stores. That number is growing by several hundred stores per month. By 2030, I think that number grows to 30,000 stores, which would still just represent about two coffee houses per 100,000 people in China (Starbucks operates 4.5 coffee houses per 100,000 people in the U.S. today, with the delta explained by lower per capita coffee consumption and greater competition).

With 30,000 stores and $200,000 in revenue per store, that implies $6 billion in revenues by 2030.

Starbucks has historically operated at an operating margin of 15%. Assuming a 15% operating margin and taking out 20% for taxes, you’re talking about potential 2030 net profits here of $720 million.

SBUX stock normally trades at forward earnings multiple of 25. A forward multiple of 25 with $720 million in profits implies a potential 2029 valuation of $18 billion.

Luckin Coffee is valued at $750 million today.

Survival Odds?

Of course, the big risk with Luckin stock today is whether or not the company can survive over the next few months and years.

The company is burning a lot more cash than we previously thought. At the current store expansion rate and with net losses so wide, the company projects to keep burning cash for the foreseeable future. Potential forthcoming lawsuits as a result of the fraudulent sales will only increase liquidity risks.

In order to survive, Luckin will likely either have to tap the debt markets (which will dilute future profits via higher interest payments), or issue equity (which will dilute the future per share value of Luckin stock). The debt and/or equity markets also have to be willing to finance a company that just fabricated most of its sales.

So, there are huge risks with Luckin stock.

But I think the company will successfully navigate through these risks by issuing new debt or equity and will ultimately survive this fiasco and turn into the Starbucks of China by 2030.

If so, Luckin stock has huge upside potential over the next five to 10 years.

Bottom Line on Luckin Stock

This one isn’t for your lunch money. Only invest what you are willing to lose in this stock.

However, if you have some extra cash you are willing to be extra risky with, Luckin stock is worth your attention. If the company successfully navigates through current challenges and gets back to its core growth narrative of providing cheap, quick coffee service to Chinese consumers, then Luckin stock could be a huge winner in the long run.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities. 

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