Luckin Coffee (OTCMKTS:LKNCY) will go down as one of 2020’s more sobering investing stories. In a crazy year where just about everything crashed and then subsequently recovered, Luckin Coffee stock broke the mold.
That’s because while it plummeted, it never really bounced back. Luckin shares went for as much as $50 at one point just a year ago, and are now down 90% from the peak.
The company’s accounting fraud fully justifies that decline. Luckin dramatically inflated its revenues using clever accounting maneuvers. In turn, it used that overstated size to raise capital and bolster its international profile.
Since investigators revealed the fraud, Luckin’s shares collapsed, much of the management team left, and the Nasdaq delisted Luckin Coffee stock.
Yet traders haven’t given up on the company. There’s potentially still a turnaround story, at least in theory. Luckin’s stores are real, and the company appears to have a lot of cash even despite the accounting issues.
With a fresh start, can Luckin recover? One thing to keep in mind, however, is that Luckin’s founder isn’t totally out of the picture just yet.
Luckin Founder Raises Money
One bit of intriguing news out of the Luckin universe recently relates to its founder, Lu Zhengyao. Last month, Zhengyao disclosed that he will be selling his stake in Ucar, which focuses on rental cars and limousines.
Interestingly, Ucar shares plummeted more than 50% earlier this year as investors reacted to the Luckin scandal by dumping other companies with a connection to Zhengyao.
Since then, Ucar’s stock has bounced from a low of less than 1.50 Hong Kong dollars to nearly 4 Hong Kong dollars now. While it is still far down from its highs a few years ago, this shows some restoration of confidence. That could be a good sign for Zhengyao.
And by extension, with him raising $232 million from his sale of his Ucar stake, that will give him more money to shore up his other holdings.
Perhaps this will be beneficial for Luckin, if the founder wants to try put that money to work. Though given his connection to the scandal, you could also argue that it’d be better if he totally exits the scene at Luckin.
Not for the Impatient
The thing with Luckin Coffee stock now is that it is losing its visibility. The longer the company is not on the Nasdaq and isn’t generating the headlines, the more people will forget about it.
The idea of being the Starbucks (NASDAQ:SBUX) of China is appealing. However, if no one is talking about the company and you never see anything new happening with it, the stock isn’t going to perform anytime soon.
So far, Luckin’s new management team hasn’t shown any particular interest in keeping the stock in the public eye. It’s not issuing much in the way of press releases or information to keep shareholders updated.
The company no longer has the same scheduled reporting obligations that it would if it were still on the Nasdaq. Just look at the corporate investor relations website, the last regular earnings report was from 2019, and the most recent press release was back in September.
And there’s less scrutiny of a company’s financials when it isn’t on a major exchange. That’s not ideal, given the past accounting scandal here. Thus, if you want to own Luckin, know that you’ll need to be in for the long-term, and there’s no real timeline for when the bet might pay off.
Luckin Coffee Stock Verdict
If you view this as a sort of venture capital investment, there could be some sense there. Ultimately, if Luckin manages to become China’s dominant coffee chain, it’s going to be worth a lot more than its current $1 billion market capitalization.
However, given the current opacity of the situation — and the likelihood that things will remain that way for years — you’re going to have to wait and see what happens with relatively few data points to look at along the way.
Making matters worse, Luckin has its history of deceptive behavior. To be fair to the company, it has changed management and performed an audit of its finances. Still, when you make an investment in an illiquid and lesser-followed company like Luckin, you’d prefer to have full faith and confidence in the company’s team.
All that said, there’s enough reasons for caution that most investors should probably avoid this one., and that goes for traders as well.
The trading volume is declining and the stock is starting to drift lower. That’s not an attractive set-up. Unless you see a relisting to a major stock exchange, there’s no need to be involved in Luckin Coffee stock anytime soon.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.