I’ve been critical of Luckin Coffee (OTCMKTS:LKNCY) in numerous articles in the past year. And since Luckin stock now trades on the pink sheets as a penny stock, it’s not like I don’t have a reason.
The Chinese company committed fraud, which is an offense that many companies never recover from.
Nevertheless, Luckin stock is making a lot of cynics like me look foolish. This simply proves that the determination of traders to make a quick profit can last longer than any bullish argument.
But should it?
The Covid-19 pandemic enhanced the gamefication of the stock market. Many traders have benefited from buying dirt cheap stocks and flipping them before they get burned.
However the ability to make a quick buck is about the only reason I see for giving Luckin Coffee a second look.
The Bullish Case for Luckin Stock
Aside from re-appointing a former director, the company has a business model that has disrupted Starbucks (NASDAQ:SBUX). Luckin realized that the Chinese consumer does not want to hang out and drink their coffee. They want to grab and go.
So while Luckin has over 6,000 stores in China, they’re not designed for customers to hang out. Rather, they are meant for customers to pick up the coffee they ordered on the app and be on their way.
This got the attention of Starbucks. And the company had to modify its business plan to address it. But the problem is the Luckin’s fraud gave Starbucks time. And in that time, it’s clear that the company has enhanced its digital model and is now competing in China.
In fact, the pandemic in both Wuhan and here in the United States was probably an aid to Starbucks in creating this new, socially distant model.
Where’s the Profit?
Matt McCall recently examined Luckin stock and found it lacking in a key area that investors look for, profit.
“So, as far as we know, investors are valuing a sharply unprofitable business at almost $1 billion,” McCall writes.
That sounds about right to me. And the reason why is an issue that I mentioned in a prior article. The company relies on heavy marketing and promotion.
In fact, as McCall wrote the company in last year’s third quarter (which is the last quarter we have any financials), the company spent $137 million combined in sales and marketing. And with net cash on the books of only around $330 million, the math looks a little dodgy.
Show ‘Em If You Got ‘Em
The company’s fraud has been well documented by InvestorPlace writers. And I’m all for the idea that a company can have a second chance. But I can’t help but notice that Luckin has yet to give investors any sort of update.
In fact, the company hasn’t reported earnings since November of 2019. And any numbers reported at that time have to be taken with a gallon of salt. As a Chinese company, Luckin is not necessarily bound by the SEC rules in terms of when they report earnings.
This is one of the reasons that President Trump was threatening to delist Chinese stocks. That would appear to be less of a concern for the company in a Joe Biden administration.
And the company has made some nice cosmetic changes. For example, they re-appointed Sean Shao as an independent director to Luckin’s board. Shao has an impressive track record and it seems that Centurium Capital, which has 11.7% voting rights, heavily influenced this decision. But Luckin appears to be in a race against time.
I’m not saying that Luckin is not on the up-and-up. At this point, they’d be foolish to continue to mislead investors. But in this game of poker, it’s time for the company to show its cards. Until it does, Luckin stock is a trade not an investment.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.