While most Redditors are focused on Gamestop (NYSE:GME) and AMC Theaters (NYSE:AMC), some traders have moved on to other names, like Luckin Coffee (NYSE:LKNCY). Luckin stock has been back on the move in recent weeks.
You remember Luckin, don’t you? It was billed as the Chinese alternative to Starbucks (NASDAQ:SBUX). Sadly, a lot of its sales turned out to be phony.
After flirting with bankruptcy it was only mostly dead, but “mostly dead” is”partly alive.”
Since the start of 2021, Luckin Coffee shares have jumped 56%. It opens January 28 at $13.30, a market cap of $3.4 billion. That’s about 6.5 times its claimed 2020 revenue.
A Closer Look at Luckin Stock
What seems to be going on with Luckin stock is a Gamestop-like short squeeze. Ihor Dusaniwsky of S3 Partners, an analytics firm, tweeted about this at the end of 2020. He reported that half the company’s shares had been shorted. Ben Sturgill of Raging Bull was also suggesting people play the breakout, citing a short interest of 48%.
Shorts were heroes in the original Luckin scandal. There are investors asking today why shorts even exist, and this is one reason why. The possibility of making money on a short gives people an incentive to seek out fraud.
But too many shorts can ruin the coffee. An excessive short interest can lead traders to buy a bad company, pushing the price higher. I’ve been repeating the old aphorism of Daniel Drew, a famous 19th-century speculator who wound up broke. “He who sells what isn’t his’n, must buy it back or go to pris’n.” Shorts have a limited “upside,” which is the company’s market cap, but an unlimited downside, because as we’ve seen prices can go to the sky.
JD Supra discussed the Luckin fraud on Jan. 26. The company made a settlement with the Securities and Exchange Commission (SEC) and paid a $180 million fine.
What’s Really Going On?
The recent quarterly report from Starbucks offers insight into what’s really going on. While U.S. sales declined, sales in China were up. With chief operating officer Roz Brewer leaving to head Walgreens Boots Alliance (NYSE:WBA), maybe it’s time to bring Belinda Wong, the company’s head of China operations, stateside.
But if Starbucks is rising in China, what does that say about Luckin? I could find no reliable financials on Luckin’s performance since the scandal. Speculators are flying blind.
Since the settlement, Luckin’s new CEO, Guo Jinyi (who has extensive ties to the old regime) has been talking a good game. He says individual stores were profitable in August. It could be cash flow positive in two years, and it’s settling with bondholders.
The company has even resumed franchising with no up-front fee and a capital requirement of just $57,000.
But some company insiders want Guo, who goes by “Dr.” Guo (it’s a Ph.D in transportation and planning management) removed, accusing him of corruption.
The Bottom Line
Our Josh Enomoto has created a bull case for Luckin, built on negative interest rates, Chinese patriotism, and the gullibility of young investors.
That’s not the kind of game this old man plays. I prefer to buy good growth stories and let time work for me. Our research staff says Luckin is “still toxic” and I agree. Its reputation is still a shambles.
But I wouldn’t short it, either. Frankly, I don’t trust anyone on either side of this trade. That’s also what it is, a trade. Luckin Coffee is not an investment.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
