Luckin Coffee Is Soaring, But Investors Shouldn’t Be Fooled

For its controversy, and there have been heaping doses of that, Luckin Coffee (OTCMKTS:LKNCY) still catches the eyes of some investors. It’s easy to understand the resurgence in interest in Luckin stock. The name, which trades on the pink sheets, labored around $1.40 in late May, but it’s more than tripled since then.

Outside view of a Luckin (LKNCY) shop in Wuhan, China.
Source: Keitma /

Remember, this is still a company grappling with a fraud controversy. Hence, the not-so-prestigious pink sheets listing, but for some reason day traders, er, investors, still like this name. Call it the “Robinhood effect.”

As my colleague Chris Markoch accurately points out, the notorious trading app Robinhood, beloved by Gen Z and millennials galore, doesn’t allow clients to transact in over-the-counter and pink sheets stocks. Still, there’s some Robinhood effect on Luckin stock.

The reason being is simple. In the earlier days of the novel coronavirus pandemic, when entertainment options were scant, prevailing wisdom became that due to lack of concerts and live sports, among other outlets, younger market participants turned to trading to get their entertainment fixes.

In the process, an array of controversial, financial flimsy, low price tag stocks were bid higher. Hertz Global Holdings (OTCMKTS:HTZGQ), anyone?

Point is, buying cheap stocks became cool thanks to Robinhood and some investors likely applied that line of thinking to Luckin, acquiring shares via other brokers.

Luckin Stock Is Still Problematic

Prior to the fraud implosion, Luckin was seemingly adept a few things in its home market of China. Namely, the company tapped into tech-savvy nature of the Chinese consumer and the desire of those patrons to not have a Starbucks (NASDAQ:SBUX) experience.

One of the primary reasons Starbucks rose to prominence here in the U.S. was positioning as an experience. It’s not just about the coffee. It’s about the community within the physical structure, going to the stores on a repetitive basis and hanging out or working there for hours on end.

Obviously, the model works in the U.S., but that’s not what Chinese customers are looking for. They want to grab their coffee, pay via smartphone and be on their way. Problem is that quick service and payment technology aren’t wide moat traits. Any competitor can adopt those models and Starbucks is doing just that China all while Luckin continues dealing with its dark past.

Even for the most devoted Luckin investors, the financial nitty-gritty of the company isn’t attractive. As of Nov. 12, the company’s market capitalization is $1.2 billion. Add on roughly $330 million in net cash and we get $1.53 billion.

That’s small-cap territory, but it also implies Luckin is grossly overvalued and that investors are betting blindly because the company’s prior financial results were spotty to put it delicately and it hasn’t delivered any results for 2020. That’s right. Almost 11 months into the year and there’s very little in the way of tangible data to inform investors about a Luckin recovery.

Not Much to Cling To

Perhaps compounding potential trouble for Luckin investors is that founder Lu Zhengyao has other businesses that are struggling. He recently sold a $232 million stake in his Car Inc. car rental business to raise cash as rumors circulated some high-ranking executives were mulling departing the firm.

That’s just one scenario, but it indicates that at the highest levels, restoring Luckin to its past glory is going to be a lengthy process and one that may not materialize at all.

In the meantime, without solid, independently audited financials, investors are shooting in the dark and hoping for the best with Luckin stock. That’s not a recipe for success.

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

Todd Shriber has been an InvestorPlace contributor since 2014.

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