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Luckin Coffee Stock Is Still Looking Terrible

The Chinese coffee giant must prove it's cleaned up its act before investors touch Luckin stock

If you thought China was a tea-drinking nation and not at all into coffee, you’d be right – supposing your notions were from a generation ago. Thus insofar as investment, the opportunity presented by Luckin Coffee (OTCMKTS:LKNCY) was tempting. Until recently. Now it’s turned into one bitter brew and the question is whether Luckin Stock can outlast the woes that made world headlines.

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

In April, Luckin Chairman Charles Zhengyao Lu and CEO Jenny Zhiya Qian surrendered Luckin to lenders after a company Lu’s family controlled defaulted on a $518 million margin loan. What’s worse, “Much of [Luckin’s] 2019 sales were fabricated,” Reuters reported, “sending shares plunging as much as 82% in U.S. trading and sparking an investigation by China’s securities regulator.”

And this is where you want to sink your money?

Too Many Serious Questions

Despite the tsunami of bad news, Luckin Coffee still operates more than 6,500 locations in China. That’s at least 2,000 more than the 4,123 stores that Starbucks (NASDAQ:SBUX) had at the end of 2019.

Yet in the mathematics of financial impropriety, the number 518 million is greater than 6,500. It’s thus fair to say that Luckin stock is radioactive and shouldn’t be touched for at least a year. Monstrous lies about sales? Loan defaults? Investigations? Lawsuits? It’s not exactly the stuff of smart investing.

That noted, one critical question deserves a shot: With the company’s shenanigans exposed, has LKNCY set the stage to pick itself up and resume its domination of the Chinese coffee market?

Luckin Stock: Look Out Below

Between April 1 and May 22, Luckin stock did a screaming dive toward the ground, dropping 95%. Strange to say, perhaps, but Luckin is lucky it didn’t wind up a flaming wreck. Fast forward to the second week of September and at $2.43 per share, LKNCY is actually up 74% from its May nadir. But at that price, percentages are deceptive as just a few pennies one way or the other create the impression of massive movement. Better to consider that since April 1, Luckin stock is off by 91%.

As for looking back to the pre-default days, here’s where things get tricky. Investors should give up – immediately – the idea of studying 2019 share prices for intelligence, since the company fudged its numbers. Luckin went public in May 2019.

As to the future, it doesn’t matter who’s at the helm and what kind of forecasts they make because even if they are 110% truthful, they can’t factor in the eventual impact of the lawsuits the coffee giant faces.

Good luck on the leadership thing, meanwhile, as Zhengyao Lu isn’t going away even if the CEO did. Though he left the company’s board, some observers believe it’s a ruse to boost investor confidence. His voting interest in Luckin Coffee did not decrease despite the tens of millions of shares he forfeited to banks, including Goldman Sachs Group (NYSE:GS) and Credit Suisse Group (NYSE:CS). He also had a hand in picking the company’s replacement board, which doesn’t suggest the rosy scent of reform.

Stay Far Away From Luckin

Granted, Luckin’s thousands of stores still put it atop the Chinese coffee heap. Any company that has a third more locations than Starbucks can’t be dismissed outright. That alone could make Luckin a tempting target for acquisition; the company also has the option to go private.

Just because something is possible, though, does not mean it’s probable let alone profitable. And in the high-stakes world of Chinese coffee sales – which hit $4.4 billion in 2018 – Luckin’s value in terms of brand loyalty isn’t clear. InvestorPlace’s Patrick Sanders pointed out that a generous flow of free snacks lured many customers in the door. Thus, “We have no idea if customers are really that into Luckin, or if they’ll be willing to keep drinking coffee drinks without the freebies.”

Here’s what isn’t free: your hard-earned investment dollar. Sometimes the bottom-feeder approach can work and there’s no telling whether a few shares of Luckin stock today will be worth four times as much tomorrow.

But the opposite may be even more likely. Considering how the company got to thousands of stores, no one has any way of knowing whether everything will collapse in a few months – especially if other irregularities are revealed. You see, cooking free pastries is one thing, cooking the books another.

So if for some reason you’re still thinking of a major play, excuse me while coffee squirts out my nose.

On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/luckin-coffee-stock-is-still-looking-terrible/.

©2020 InvestorPlace Media, LLC