Luckin Coffee (OTCMKTS:LKNCY) burned many investors earlier this year after it was delisted from the Nasdaq due to fraud allegations. Its COO had manipulated several accounting numbers and delivery results. But while many abandoned Luckin stock in the Spring, it has managed to make a comeback of sorts.
Only now it’s staying afloat on over-the-counter markets. While the story behind the “Starbucks of China” isn’t as glamorous as before, not everyone is ready to count Luckin out yet.
With its latest earnings report expected in the next few weeks, it’s bound to garner plenty of attention. But the question remains: Is Luckin stock worth a buy ahead of earnings?
Although it isn’t entirely dead yet, there’s still plenty of reason for caution ahead. Let’s take a closer look at the pros and cons.
Luckin Stock Survives … For Now
It’s no secret that many U.S. investors don’t trust companies based in China. Their hesitation has strengthened over the past few years with the U.S. and China entering a trade war. In many cases, the concerns are justified. After all, Chinese companies generally do not face the same degree of governmental scrutiny as U.S.-based companies. This enables potential scandals like that which Luckin faced earlier this year.
But while there’s plenty of reason to scrutinize Luckin as “just another scam,” not all analysts agree.
InvestorPlace.com analyst Luke Lango provides a strong argument for why Luckin stock could be an overlooked stock with 10X potential. Lango points to it being a legitimate company (regardless of its former untrustworthy management) backed by a legitimate catalyst (the increasing popularity of coffee in China).
“The idea is simple. Young consumers in China are becoming more and more like their U.S. and European counterparts every day. Recently, this includes an uptick in coffee consumption in China. As young consumers increasingly become the driving force of China’s consumer economy, China’s retail coffee market will go from nascent to enormous by the end of the decade.”
According to Lango, the scandal is no longer a concern. Luckin has endured the necessary legal punishments and fines, and the earnings report will offer it a means to close the book on the controversy. While he’s right about the company’s potential, it’s still too soon to take a bet on Luckin stock again.
It’s true that Luckin might be “purified” through the additional scrutiny it’s bound to face. However, there’s no good reason to bull-rush into the stock just yet. If what Lango says is true about the company moving past this controversy after earnings, then I’d suggest that investors simply wait for that movement to actually happen. If it does, then it’ll certainly be worth putting on your radar again.
The Bottom Line on Luckin Coffee
Even if the bullish argument proves true, there’s no reason to take an immediate risk on Luckin.
Although the company eliminated its troublesome management, there’s no guarantee that it won’t commit similar fraud in the future. If you’re a believer in the saying “once a cheater, always a cheater,” then obviously you should steer clear. But if the company does manage to assuage concerns of fraud, its case as a potential 10X stock (as outlined by Lango) will remain.
The thesis behind Luckin stock is undeniably strong; however, it’s still tainted by the extreme risk implied by the scandal. As such, it’s wise to mitigate as much risk as possible with patience. Massive gains are still obtainable (and likely) if everything pans out in Luckin’s favor.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article.