<p>[Editor’s note: This story was written prior to the news that Luckin Coffee allegedly fabricated its sales. Given these allegations, all investors should approach this stock with great caution.]
China is returning to normal after beating the corona virus with a strict quarantine policy. Many American investors now assume that everyone there is ready for a nice, hot Luckin Coffee (NASDAQ: LK). Luckin’s share has fallen by 30% since February, but that’s not bad considering what has happened to the rest of the market.
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The company was fortunate to receive a $ 865 million share increase in January. It was obviously for expansion. But it also got the company through the worst of the financial storm.
Beats the coffee cart
Since then, analysts have pounded the table for Luckin, calling it a Starbucks (NASDAQ: SBUX) rival, although it mainly operates kiosks and delivery services, not stores with seats.
InvestorPlace advisers have been among the bulls. Matt McCall has called Luckin one of the best opportunities on the market, because of how well it held up in the market crash.
Luckin’s rapid growth justifies a higher share price, writes Chris Lau. He was pleased with how the stock averted a short-selling attack by analyst Muddy Waters and called its methodology flawed. The shares were held up in February and did not start falling in earnest until the beginning of March. When the picture began, traders jumped into the $ 17.50 / share set, and stocks bounced off a low of around $ 25.
Luckin has expanded into tea in hopes of averting upturns like Naixue’s tea, which is planning a US public offering when markets return to normal.
During what now looks like the worst of the crisis, McCall emphasized Luckin’s long-term strengths. But investors will only guess at results for a while.
The company’s latest report, which was considered outstanding, had more than tripled revenue from the previous year. But it was issued in November. Luckin’s next is due on April 1, with a loss of 26 cents per share on revenue of $ 330 million expected. But it only covers the December quarter before the virus. The September quarter is still unaudited.
Then there is the question of these numbers.
Luckin is facing lawsuits and claims that its third quarter reports inflated sales numbers.
Bullish analysts insist that Luckin is well managed, that it disturbs Starbucks through efficiency and technology. A $ 2 cup delivered to your desk is cheaper than a $ 5 cup you buy in a store.
The problem is that, if Luckin’s biggest advantage is the price, when will Chinese workplaces acquire Keurig Dr Pepper (NYSE: KDP) machines and brew their own? All that is needed to make a good coffee pot is some beans, a grinder, hot water and a carafe. Costco Wholesale (NASDAQ: COST) brew I enjoy costs about $ 7 per pound.
How fast Luckin can grow and how big, remains something of a guessing game.
To continue to grow, once the country is saturated with kiosks, Luckin must continue product innovation and pay its people. In the end, coffee is a human experience, or it is a commodity. At some point, the news of the current model will disappear. Is Luckin ready for the market to mature?
The conclusion of Luckin Stock
But for me, there are better games. There are technical stocks, cloud stocks and retail in the food chain. There are stocks that have been hit much harder than Luckin, where business will soon return. There is Starbucks itself, which also sells for about a third of.
In other words, there are safe things in the new market. You do not have to take the chance to find profit.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, today and tomorrow with Moore’s team, essays on technology available in the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. At the time of writing, he had no position in any of the above-mentioned securities.