Luckin Coffee (OTCMKTS:LKNCY) executives are surely smiling as traders drawn to cheap prices slowly lift shares of Luckin stock. This investment is a fool’s errand, though, since the disgraced company remains opaque and investors are rolling dice in the dark.
Don’t get me wrong. I have nothing against rolling dice. It’s a perfectly acceptable way to advance play of a board game.
But when it comes to the liars at Luckin, who shamelessly faked revenue reports at the expense of honest stock traders, investors should simply shun the company. There are many investments available in legitimate companies.
The Tale of Luckin Stock
Luckin Coffee opened its first stores in Bejing in 2018. It is often compared to the U.S. coffee juggernaut Starbucks (NASDAQ:SBUX), but that is only an easy frame of reference as both are coffee retailers.
Luckin and Starbucks differ greatly – and not just because Starbucks doesn’t provide fraudulent performance figures. Starbucks built its devoted clientele by providing excellent products and service, as well as an atmosphere where a person can relax for a few minutes. It is not accidental that customers on the East Coast can experience a bit of that Seattle vibe by visiting a Starbucks.
Luckin is more like a sidewalk vendor peddling cheap beverages. Their shops are geared toward getting the people in and out. Customers must use the company’s smartphone application to place orders and pay. (Why a customer would trust Luckin with access to personal smartphone data is a mystery.)
The company expanded rapidly, opening thousands of locations and discounting aggressively. It is unclear if customers are drawn by the streamlined process or the discounts.
In the last year, Luckin stock has ranged from a pathetic 95 cents per share to $51.
Not a Rounding Error
About a year after it launched, Luckin went public and secured a spot on the Nasdaq, trading shares under the ticker LK. The stock climbed and investors thought they discovered the “next” Starbucks. Those expectations shattered a few months later, however, after reports surfaced questioning the company’s earnings reports. The company strongly denied the allegations, of course, just like a rookie defensive safety flagged for pass interference.
On Jan. 30, 2020, Muddy Waters Research alleged Luckin exaggerated its third-quarter 2019 sales by 69% and the next quarter’s sales by 88%. Four days later, the company responded and said the allegations were false and misleading.
But they weren’t.
Luckin admitted the scheme two months later, and priced the exaggeration at about $310 million. In a lesson for U.S. investors, it was only after the company’s admission that China’s securities regulators began investigating Luckin. The authorities levied fines of nearly $9 million in September.
Also, the company shuffled executives after the affair came to light.
Nasdaq officials halted trading in Luckin stock in April and not surprisingly, shares plummeted. The company was delisted from the exchange in June and ended up as a penny stock on the over-the-counter market under the ticker LKNCY.
Luckin stock has been a bottom feeder since April. Aside from a couple of spikes, shares have traded around $2 and $3. Shares reached $5.50 last June and again in October. More recently, LKNCY is trading between $4 and $5.
The Bottom Line
Penny stocks are volatile and very risky. They are ripe for manipulation. And frankly, Luckin could pose be the poster child. Not only is it risky and unprofitable, but the company is unreliable.
Luckin violated the trust that is required in this relationship. The company’s behavior confirms there is no substitute for due diligence before buying stock. Investors should reduce risk in their portfolios by focusing on companies with a clean track record (of more than one year) and insist on audited financial information.
There is no basis for investors to have any confidence in Luckin Coffee. This is still one to avoid.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.