After the fall of Luckin (OTCMKTS:LKNCY), what should investors make of Luckin stock?
To say the Chinese coffee company’s share price has imploded is an understatement. The stock price of the “Starbucks (NASDAQ:SBUX) of China,” as the company is known, was trading at more than $40 a share in March. But after an accounting and fraud scandal, the shares are trading today at just over $2 per share. That’s a whopping 95% decline in value.
The Nasdaq stock exchange has delisted the stock and it is now trading on the over-the-counter market. Board members are resigning and rumors are growing louder that Luckin will file for bankruptcy. The company had only been a publicly traded company for about six months when the fraud scandal broke.
So, with so much bad news and negativity surrounding the company, can Luckin stock be redeemed?
Let’s take a look.
Damage Done to Luckin Stock
The alleged $300 million fraud on the part of Luckin’s former Chief Operating Officer would be bad enough on its own. But coming, as it did, during escalating political tensions between the U.S. and China made the Luckin scandal a whole lot worse.
Hawks within the Trump administration and a number of Wall Street regulators pointed to Luckin as an example of scandal-plagued Chinese companies seeking to defraud American investors. Many critics used the Luckin scandal to call for all Chinese companies to be delisted from U.S. stock exchanges.
In May, the U.S. Senate overwhelmingly approved a bill that would require Chinese companies with U.S. listings to submit to scrutiny by the Public Company Accounting Oversight Board, a body that was created after the collapse of Enron.
Effectively, Luckin coffee became the poster child for Chinese corporate mismanagement and fraud. It has become a political football in both Washington, D.C. and Beijing. The damage done has been so severe that it goes beyond simply correcting the fraudulent accounting. Luckin is now an infamous brand, up there with other notorious scandal-plagued companies such as Theranos, Enron, and more recently, Germany’s Wirecard.
In fact, though scrutiny is tight on Chinese firms, this list of examples show the problem is more widespread. Thaddeus Neururer, PhD, assistant professor at the School of Accountancy, University of Akron, wrote in an email to InvestorPlace that “all investors should be aware that all firms, regardless of the country of their headquarters or operations, have the potential to commit fraud and these issues may not be caught by auditors. In these cases, an investor’s entire stake would likely be wiped out. ”
Coming back from this level of infamy is almost impossible.
Where To From Here?
It’s not clear what’s next for Luckin coffee now that the company no longer has access to the stock market to raise capital. Bankruptcy seems like the logical next step and shareholder lawsuits are expected.
The company’s Chief Executive Officer was fired in May and the Chairman of the Board of Directors was out in July. Recent reports from China state that consumers in that country are shunning the brand. Its recent attempts to sell items unrelated to coffee such as food and electronic devices don’t seem to be working. It’s hard to see how Luckin restores confidence in the public and investors moving forward.
While Luckin stock has experienced a few upticks in recent months — jumping to $5.51 a share in June and to $4.33 in July — those sharp moves higher were largely due to speculative day trading. The stock has continued to fall back to the $2 per share range since May of this year and has largely flat-lined in August.
Analysts completely abandoned the stock after it was delisted from the Nasdaq, and now there is only one analyst offering a “buy” rating and a $20 price target on the stock. Seems like wishful thinking at this point.
The Verdict on Luckin Stock
Trading Luckin stock at this point is extremely risky. Buying and holding shares in hopes that the company will stage a miraculous comeback is delusional. Luckin Coffee, its brand, reputation, and share price, have been eviscerated by the fraud scandal that has enveloped the company.
Taking a position at this point is gambling against all odds and hope of success. Investors wanting exposure to a coffee chain that is reputable and offers the potential for solid growth and returns should put their money behind Starbucks or Dunkin’ Donuts (NASDAQ:DNKN). Luckin is a lost cause.
As of this writing, Joel Baglole did not own any of the aforementioned securities.
