Things continue to roll downhill for Luckin Coffee (OTCMKTS:LKNCY). Once considered the “Starbucks of China,” the company’s growth story has come to a halt. Its hopes of a nationalist boost have been squashed as Chinese officials prepare for disciplinary action against the company. All of this means avoiding Luckin stock should be a no-brainer at this point.
It has been quite a rollercoaster year for Luckin. The company revealed in April that an internal investigation unearthed an accounting fraud of $310 million. Subsequently, a special committee was formed which suspended CEO Jian Lu and other employees.
Fast-forward to August, and Luckin stock has been de-listed from the Nasdaq and continues to face internal management problems. Year-to date, the stock has shed almost 90% of its value.
Trouble From Home
I always thought that regardless of the dubious activities of Luckin, it would continue to get support from home. After all, we have seen how the Chinese government has rallied behind Huawei, which faces a barrage of sanctions from different countries.
An online survey by news portal Sina Tech (NASDAQ:SINA) indicated that many customers accepted Luckin’s apology. (More than 50% of the 80,000 respondents indicated acceptance.) However, I suspect that many people responded positively because they feared that their vouchers would be void if the company closed down. Still, I felt Luckin could ride the nationalist wave to an extent.
But that feeling is quickly fading and my thoughts toward Luckin stock have changed.
China’s Ministry of Finance is preparing punitive action against the company. The ministry stated that after completing a month-long investigation, it would penalize two of Luckin’s subsidiaries. The penalties are currently unknown, but are likely to relate to unfair competition and illegal conduct.
Luckin’s scandal has significantly damaged the reputation of Chinese companies listed on the U.S. stock exchanges. And many are — rightfully — hesitant to even consider taking a risk with the stock now.
Luckin’s Woes Will Power Key Competitor Starbucks
If Luckin gets over its management and transparency problems, could it still be a profitable business? The short answer to that question is probably not.
In my previous articles, I talked about how the Starbucks (NASDAQ:SBUX) comparison is misguided. For starters, Luckin focuses on carry-out, while Starbucks mainly focuses on dine-in. Moreover, Luckin’s business model is one-dimensional, which has been exposed by its corrected financial figures.
I also feel that the buzz surrounding Luckin’s rise has overshadowed Starbuck’s expansion efforts in China. In April, Starbucks announced its collaboration with investment firm, Sequoia Capital, to expand its presence in China’s technological scene. Starbucks hopes to invest in emerging food and retail companies in China through Sequoia Capital.
Moreover, Starbucks is expanding “Starbucks Now,” its mobile pre-order and pickup feature, to four of Alibaba’s (NYSE:BABA) top platforms.
Customers can now place orders on Alibaba’s Taobao and Amap. “The extended service enables Starbucks to engage with more Chinese consumers through multiple channels that tap into the Alibaba digital economy’s user base of nearly 1 billion,” stated Alibaba.
Moreover, Starbucks also announced that it will expand its roasting facility in China in 2022. The expansion plan is part of its new Coffee Innovation Park. The company is investing $130 million in the facility and it will be a key component of its roasting network.
Final Word on Luckin Stock
There are hypothetical scenarios where Luckin could bounce back, but its highly unlikely.
The company doesn’t seem serious enough in fixing its internal management and transparency issues. Perhaps, its most significant challenge is reenvisioning its business model to boost sustainability. Luckin has a lot of cash, though, which it could use to get back to the drawing board.
However, despite these possibilities, investing in Luckin stock isn’t a good idea at this stage.
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.