With shares more than doubling in a matter of months, is it time to dive back into Luckin Coffee (OTCMKTS:LKNCY)? It depends. Earlier this year, Luckin stock cratered, as an accounting scandal brought its growth story to a halt. But, after getting delisted from the Nasdaq, those who bought at its lows have seen fast profits.
What do I mean? When it initially started trading OTC on Jun 29, shares were near $1.50 per share. But, with speculators betting on a comeback, the stock went parabolic, soaring to over $4 per share by July 8. But, as speculation cooled, the stock headed south once again, heading to around $2 per share by late August.
Yet, that was the time to make a “bottom fisher’s buy” in the Chinese coffeehouse chain’s shares. In the two months that followed, Luckin stock again shot to the moon, with shares today trading for between $4.40 and $5 per share.
So, is the company “crushing it” with a turnaround? Or are investors betting on a recovery that’s not even in motion? Without timely financials, the jury’s still out. Sure, there is a pathway for the company to not only put its past behind it, but get back on the growth train as well. Yet, with other negative factors at play, it’s hardly a slam dunk.
In short, after its performance as of late, tread carefully, as it’s hard to tell whether a recovery is priced in, or if there’s still runway for shares to continue headwind toward double-digits.
Luckin Stock and Comeback Odds
Can this upstart coffee chain still become the Starbucks (NASDAQ:SBUX) of China? Let’s just say that remains a stretch goal. Sure, this less-known chain has more locations than its better-known rival. Yet, after the scandal, it’s going to take some time for Luckin to come close to Starbucks’ revenue numbers.
That being said, it may not need Starbucks-tier success for shares to perform well. What do I mean? On Oct 12, InvestorPlace’s Luke Lango ran the numbers on Luckin’s long-term potential.
In short, Lango makes the case why the company could grow from 6,500 locations today, to 30,000 locations by 2030. And, even if each of these stores generates just a fraction of Starbucks’ U.S. in-store sales, that’s still $6 billion per year in revenue. Assuming similar margins, and a 20% tax rate, the company could be generating $720 million per years in earnings in 10 years.
Given the stock today sports a market capitalization of $1.2 billion, that means explosive share price growth could still be in the cards. Assuming this bull thesis pans out. Yet, while there’s enough here to make a bull case, there’s also plenty to make a bear case as well.
It’s Too Risky to Go Short
As discussed above, there’s a way for this company to overcome its past issues, and still become a success story. Yet, there’s no guarantee the company will not face additional fallout from the accounting scandal.
How so? As this commentator noted, Luckin isn’t out of the woods just yet. Sure, its regulatory fines in China only amounted to $9 million. But, the company could still be on the hook for hundreds of millions of dollars if it loses lawsuits from U.S. investors.
And that’s on top of what could be dwindling cash reserves. Sure, with China in recovery mode in the aftermath of the novel coronavirus, cash burn may be less of an issue now. But, until we have accurate and timely numbers, investors in the U.S.-listed stock remain in the dark.
Yet, that may not be mean it’s smart to bet against Luckin stock. Yes, an increased in bullishness over this stock’s prospects have pumped it up in recent weeks. But, the aforementioned concerns (lack of recent financials, liabilities) continue to weigh down on shares.
All it’ll take is a positive press release out of the company to fuel another rally. It could be updated financials, settlement of investor litigation, or even a partnership deal. Any of these would put many more points into this stock.
So, while buying this stock remains more like gambling than investing, the risk of another epic move higher makes this a stock you don’t want to short.
Tread Carefully Amid Uncertainty
So, what’s the call on this turnaround play? While Luckin is down, you can make the argument its out just yet. With Chinese regulators giving it a slap on the wrist, the company has been given a second chance.
Yet, while this could mean the company has a shot at becoming a multi-billion dollar company, much uncertainty remains. Given the risks still on the table, it’s best to tread carefully with Luckin stock for the time being.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.