The good news is that Luckin Coffee (OTCMKTS:LKNCY) is still a penny stock since being delisted from the Nasdaq stock exchange. For those that are not familiar with Luckin, I say that’s a good thing, because it doesn’t merit a larger price. However, Luckin stock is up 37% from when it started trading as an over-the-counter stock. In fact, a quick glance at the company’s stock chart shows that there are over 1.6 million shares exchanging hands today.
While that is only a fraction of the 235,378,000 outstanding shares as of this writing, it’s still a noteworthy number. It’s been enough to drive the stock up and make it a trendy bankruptcy stock. But the questions are who and why?
You Can’t Blame It on Robinhood
I can make a snarky comment about Luckin robbing from the rich, but I can’t blame Robinhood traders for keeping Luckin stock alive. Robinhood does not offer the ability to trade over-the-counter stocks. And that’s what has become of the company since it committed fraud.
I’m not going to get into the details of the fraud. You can read any of the InvestorPlace writers if you’re unfamiliar with what went down. However, when the fraud first came to light, it made me question the company’s business model.
Right Idea. Wrong Product.
Luckin is taking grab-and-go to a new level. Customers order coffee via the company app, then they simply stop by one of the 6,000 locations to pick up their order and it’s off they go. No lines, no waiting. Contactless delivery. That should be appealing, right?
And that’s why something that Will Ashworth wrote stuck with me. If Luckin has such a winning model, then why hasn’t a private company come in to buy the business? Certainly there would be an attraction for a company that was labeled “the Starbucks of China.”
Or would there be an attraction? I’ve written about this before, but I’ll say it again. China does not have a coffee culture. The University of Southern California conducted a study that cited per capita coffee consumption in China is just five cups a year.
So, let’s take up the bullish argument for a second. According to the same study, the per capita consumption in the U.S. is 400 cups. In Europe, it can exceed 1,000 cups. So, if Luckin could just hook a few thousand more souls on their morning cup of joe, they could have an actual business.
But there’s a problem with this. And this time, I’ll nod in Josh Enomoto’s direction. Enomoto points out that coffee is a status purchase in China. Enomoto points out that McDonald’s (NYSE:MCD) is regarded the same way, but let’s just take his point at face value.
And if we do, then it’s not hard to say that maybe Starbucks’ (NASDAQ:SBUX) China problem was never Luckin’s model, but the simple fact that the Chinese aren’t counting the days until they can buy a Pumpkin Spice latte.
Luckin Stock May Soon Be Worthless
But here’s the bigger problem with Luckin stock. The company may still have legal trouble. Todd Shriber recently wrote about the ongoing investigation:
…the China Securities Regulatory Commission (CSRC) – that country’s equivalent of the SEC – said it’s looking into the revenue misstatement scheme at the coffee house operator…China’s State Administration for Market Regulation is investigating two entities related to Luckin and a third party for their roles in the sales inflation fraud.
In the short term, it appears that Luckin has enough legitimate sales to stave off bankruptcy. But that’s not a certainty. With so many reasons to stay away from Luckin stock, I can’t imagine why there would be 1.6 shares changing hands every day, let alone 1.6 million.
It’s too early to reward Luckin stock for merely surviving. The company must be able to deliver both transparency and accountability before it will be considered a viable stock to trade.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
