After a year of being in the news for the wrong reasons, Luckin Coffee (OTCMKTS:LKNCY) ended 2020 on a more hopeful note. And that has stoked the attention of traders who are giving Luckin stock a shot of much-needed adrenaline. The shares have jumped 80% in the last three months.
The reason for the excitement was a 44-page report from the company in charge of its light-touch liquidation. Luckin posted the report on its website on Dec. 17. InvestorPlace columnist Mark Hake breaks down the significance of the report and why it’s bullish in his recent column about Luckin.
I’m not as upbeat on the shares yet. I always presumed that Luckin Coffee would remain in business. But the company has issues with its upper management that don’t appear to be going away. And I believe that Luckin may very well have lost its first-mover advantage.
I see Luckin stock as an interesting trade, but not much more. However, I’ll let you decide.
A Curious Slap on the Wrist
Investors are hoping to hear that Luckin has reached a compromise that will settle the company’s legal troubles. What we know as of this writing is that Luckin will pay the Securities & Exchange Commission (SEC) a $180 million fine. When you add that to the $10 million the company was fined by the Chinese State Administration, the company may be getting off lightly for what looks like large-scale fraud.
And the news got better for Luckin. The company stated that the SEC is allowing the company to pay the fine “over time.” Further, as Hake wrote after reading the liquidators’ report, the fine “can be offset by any dollar amounts paid to the $450 million convertible bondholders and the shareholders.”
The report from the liquidators is a key first step in establishing investors’ trust. But by itself it’s not sufficient to move the stock higher.
The Proof Will Be in the Performance
Were investors really surprised that Luckin Coffee is not going to go bankrupt? And even if it had been headed for bankruptcy, traders have been rewarding a number of bankruptcy stocks such as Hertz (OTC:HTZGQ).
However the issue that I’ve had with getting excited about Luckin stock is its competition. Luckin Coffee took the market by storm with a business model that focused on digital orders and a “grab-and-go” model. Luckin’s troubles have given other companies a chance to adopt a similar approach. Starbucks (NASDAQ:SBUX) has had a chance to rethink its business strategy, and its sales in China have been increasing.
Luckin is attempting to build consumers’ interest in cheaper coffee than that offered by Starbucks. But Luckin is also facing increasing competition in that space. Last November, McDonald’s (NYSE:MCD) announced that it would open 2,500 McCafe locations in China over the next three years. By comparison, Starbucks has 4,700 locations.
What seems clear is that companies are intent on creating a coffee culture in China. I’ve been skeptical about that in the past. But even if it that culture can be created, Luckin won’t be sneaking up on anyone anymore.
Luckin Stock May Go Higher, But Will the Rally Last?
I can’t stress enough that Luckin Coffee will be under an intense microscope. Keep in mind that investors have yet to hear from Luckin itself. The company’s only “official” response to the liquidators’ report was to note in a press release that the report was available on its website.
In the liquidators’ report, Luckin estimated that its sales would reach $1.88 billion by 2023. To put that in context, the company will have about $603 million of revenue this year. If that occurs, the stock could easily move higher.
I understand why Luckin stock is appealing to traders. It’s an opportunity to bet a little and make a lot. If that’s your investing style, the shares may have some appeal. But before I jump on the Luckin train, I need to see more.
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 seven years. He has been writing for Investor Place since 2019.