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Luckin Agrees On Settlement But Its Reputation Remains In Shambles

With the novel coronavirus pandemic raging across the globe, an act of deceit by the fast-growing coffee chain, Luckin (OTCMKTS:LKNCY) shook the U.S. market to its core. At face value, Luckin stock was everything you would look for in a good investment.

Luckin (LKNCY) logo on the wall of a coffee shop with a customer sitting at a table below it.
Source: abolukbas / Shutterstock.com

A millennial-friendly brand using technology to provide a great service for its customers. It was China’s response to Starbucks (NASDAQ:SBUX) In just a few short years, the company became a market darling with more than 4,500 stores.

However, a quick reversal of fortunes came in the form of a report by Muddy Waters Research. The company revealed some scathing details in its report – mainly Luckin’s fabricated revenues. As expected, the coffee chain lost its allure overnight and was set to delist from the Nasdaq. Now trading on the OTC markets at just $8.33, let’s take a look at where Luckin is still a good investment.

Is a Second Act in the Cards for Luckin Stock?

Much of the economy made a comeback from its March pandemic lows but the same cannot be said for Luckin stock,which is still reeling from its accounting scam. Alleged financial fraud by the coffee company resulted in a 90% decline in its value since the start of 2020.

After months of ongoing legal battles with the Securities Exchange Commission (SEC), a verdict was finally reached. Luckin will settle the suit with a $180 million payment. While the company agreed to pay this sum, it did not admit any wrongdoing. According to Luckin’s CEO, the payment will enable the company to “continue with the execution of its business strategy.”

Following the announcement of the settlement, the stock price nearly doubled. This has many investors wondering if Luckin could potentially be a comeback story. In my opinion, this seems like an unlikely scenario. While the optics for the company are definitely better than they were prior to the settlement, the baseline fundamentals continue to remain weak. In its heyday, Luckin stock was trending at $50 but even with the strong uptick in December, shares are hovering at just the $9 mark.

The coffee company had a strong brand and a loyal customer base, but the accounting scandal caused irreparable harm to its reputation. Even with news of the settlement, Luckin stock is still not a good bet.

Management Faces Internal Strife

Adding to its legal troubles, Luckin Coffee’s management is embroiled in a battle with CEO Guo Jinyi. Executives at the company signed a petition accusing the chairman of abusing power and general incompetence. The statement cites the intent to remove Guo from his position and appoint new members to the board. 

Guo denies all the allegations and filed a request with the board to look into the incident. The letter only adds to the negative public sentiment toward the CEO since the details of the accounting scandal emerged. Moreover, a reshuffling of its board of directors will only impede Luckin’s plan for expansion. Although industry analysts claim that the management changes will be inconsequential to its bottom line, investors’ confidence in the stock is unlikely to improve.

Management scuffles and its legal battles are a recipe for disaster for Luckin stock. While the rally in its stock price is noteworthy, ultimately it does little to improve its chances of a revival.

The Bottom Line

We all love a good comeback story but at its current position, I don’t think Luckin Coffee will be one. The brand had a bold mission of taking on Starbucks in the coffee wars, which is by no means an easy task. However, the infamous accounting scandal revealed a corporate culture that lacked transparency and ethics. Even if Luckin were to improve its bottom line, the accounting scam will continue to hang over its reputation.

In my opinion, Luckin stock is a really risky bet right now. If you are looking for some long-term returns from this investment, it is unclear when they will come to fruition (if ever). I would keep an eye on the company but hold off on taking the plunge.

On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/luckin-stock-rallies-on-settlement-but-its-reputation-remains-weak/.

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