Is the worst finally behind Luckin Coffee (OTCMKTS:LKNCY)? The Chinese coffee chain is the black sheep of Wall Street, having been kicked off the Nasdaq after baking its numbers. But there’s a new chapter being written for Luckin stock.
Remember, earlier this year Luckin was listed on the Nasdaq under the LK ticker and traded for more than $50 per share. The fast-growing coffee chain looked to be a sure winner.
That was before a massive accounting scandal ruined the stock, causing trading to be halted for six weeks in April. When it resumed in May, the ticker changed to LKNCY and shares traded for a mere fraction of their previous highs.
But the last few weeks have been telling a different story for Luckin stock.
The Scandal Was a Bad One
There’s no sugarcoating how bad Luckin fell. China’s finance ministry determined that Luckin Coffee recorded on its ledgers 2.25 billion yuan ($337.9 million) in sales through fake coupons. The sales were recorded starting in April 2019 and continuing through the end of the year.
During the same period, according to the finance ministry, Luckin officials also inflated its revenue, costs and profit figures, among other numbers.
In all, China fined 45 firms, including Luckin, for acts in connection to the scandal. The total fines were 61 million yuan, or about $9 million.
Beijing said that Luckin was guilty of violating Chinese laws against inappropriate competition by inflating its numbers. It said that the public was misled by fake statistics from August 2019 to April 2020.
Luckin, which fired its CEO and COO, accepted the findings. “We have carried out an overall rectification on the related issues. We fill further improve our operations according to related laws and regulations.”
A Bounce in Luckin Stock
Once left for dead, Luckin Coffee stock is now showing some signs of life.
The stock was less than $2 per share after its delisting but is up more than 120% over the last 90 days. Shares currently are over $5 per share.
It’s a pittance compared to where Luckin was earlier this year. But it’s also a dramatic surge for a stock that many had thought beyond repair.
One action that may be giving investors some confidence is the reappointment of Sean Shao to the board of directors. Shao is one of four independent board members to Luckin. He is also known for leading the company’s internal investigation into the fraud scandal.
Potential for Profits
Given all these issues, why is Luckin stock still an appealing name for investors? Much of it has to do with the enormous potential in China as an emerging country in the coffee market.
According to Perfect Daily Grind, China has one of the lowest rates of coffee consumption on Earth. Chinese citizens drink an average of one cup of coffee per year. Just one! Tea is a much more popular beverage there.
When you consider that China’s population tops 1.3 billion, the opportunity is clear.
The trick to exploiting this market is to encourage China’s tea drinkers to switch to coffee. If you’re a coffee drinker, you know the routine of having a morning cup of coffee can be habit-forming, or even addictive.
Luckin opened more than 4,000 stores in China with a business model that emphasized pickup or delivery of its coffee drinks. Orders are placed on an app and payments are processed digitally.
In that way Luckin has begun encouraging China’s population to switch to coffee and develop a daily coffee habit. Its use of mobile ordering ties in well with Chinese culture, which is very comfortable paying online with apps. And Luckin has been able to build a valuable database of its customers.
All those factors make the coffee business in China appealing to investors. And Luckin, with all its faults, has a plan and a business model to create a sizable audience.
The biggest problem with Luckin, as far as investors are concerned, is that the company’s finances are a relative mystery. Luckin has not issued an earnings report since late last year. It’s not a good look when you go a full year without giving investors a look at your books.
Of course, it’s also not a good look for a company to suffer through a fraud investigation. And it’s completely fair for investors to look at Luckin stock with a fair amount of skepticism considering the last 12 months.
So although its recent bounce makes Luckin stock look tempting, it’s important to keep your eyes wide open if you decide to invest. While it has dynamic growth potential, it should not be a core piece of your portfolio.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article.