When I last wrote about Luckin Coffee (OTCMKTS:LKNCY), investors sentiment was genuinely bullish. However it appears that Luckin Coffee stock is coming back down to earth.
That’s not good news for investors who were hoping for the stock to move higher. However it seems appropriate for the current state of affairs.
Specifically, there’s a lack of transparency from the company about the state of its business. And without any relevant information, investors can rightfully be concerned about the company’s viability.
A Closer Look at Luckin Coffee Stock
A key for Luckin’s original success was that it was disruptive. By utilizing the power of a mobile app, Luckin met the millennial Chinese consumer where they were. This was significant because this is the demographic that is powering China’s growing coffee culture.
In fact in early 2019, Forbes described Luckin Coffee as the worst nightmare for Starbucks (NASDAQ:SBUX). But since being engulfed in a crisis of its own creation, the company is losing back any ground it gained.
The problem is that right now, there’s less ground to gain. Will Ashworth recently remarked that individuals looking to invest in Luckin should look at the recent struggles of Starbucks in China.
For all its brand recognition and aggressive growth plans, the Covid-19 pandemic has proven to take the wind out of Starbucks growth plans, at least temporarily.
In the second quarter, Starbucks posted a 19% drop in same-store sales. In the company’s recent quarter, it narrowed that decline to just 3%. However, it just illustrates the difference between the coffee cultures in the U.S. and China.
In past articles, I remarked that Luckin’s accounting shenanigans gave Starbucks an opportunity to revamp its business model.
With that in mind, there were two things from Starbucks latest earnings call that stood out. First, the company introduced a new WeChat Mini program. And it enhanced its digital partnership with Alibaba (NYSE:BABA) to gain sequential growth in active Starbucks Rewards members.
This resulted in mobile order sales doubling in the quarter. And half of those sales came from its Mobile Order & Pay business. That’s a direct response to the disruption created by Luckin coffee.
However there was something else that caught my attention. Starbucks was able to improve from a 19% drop in same-store sales to a 3% drop. And one reason for that was new product innovation. In this case, its new tea cloud platform.
I mention this because it bears repeating. China may be an emerging coffee culture. But they are an established tea culture. Starbucks made a point to mention that bring its tea cloud platform to China was a boost to sales on its earnings call. That suggests it wasn’t an insignificant reason.
What Is The New Plan?
As you know, Luckin Coffee stock was delisted earlier this year in the wake of fraud allegations. The allegations that the company manufactured sales proved to be true. And that has continued to plague the stock ever since.
One of the problems for prospective investors is there has been no news about the business. Well, there was one recent news item. The company’s founder, Lu Zhengyao is selling his stake in Ucar.
Ucar focuses on rental cars and limousines. However the $232 million that Zhengyao will raise appears to be needed for his other businesses. There’s no indication that he will be putting the money into Luckin.
But maybe he should. With only $330 million in cash, the company appears to be overvalued.
Stay Away From Luckin Coffee Stock
I’ll agree with Ian Bezek on this one, Luckin Coffee is not viable at this time. The company may have a path to future growth. But if they do, they’re being very slow to announce it.
And you would think that a company that is trying to recover from a significant fraud scandal would be more forthcoming. They’re not. And for that reason along, you should stay away from Luckin Coffee stock.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.