When it peaked at the start of 2020, Luckin Coffee (OTCMKTS:LKNCY) traded as high as $50.02. Today Luckin stock trades around $10. A lot has changed in the last year, but a comeback could be on the horizon.
Source: Robert Way / Shutterstock.com
You’ll recall that when investors discovered that the company had fraudulently reported $300 million in revenue, the stock sank fast and hard.
Luckin stock traded in the $2 range for much of the last half of the year, but only much of it.
When the company settled with the U.S. Securities and Exchange Commission (SEC) on Dec. 16, the stock’s following rally was a welcome change. So, after a more-than fivefold increase in its share price, should investors speculate on the company formerly known as the Starbucks (NASDAQ:SBUX) of China?
Luckin Stock Recovers
The stock market typically has a short-term memory for fraudulent companies, so the settlement with the SEC may prove to be a turning point for the beleaguered coffee company.
The SEC charged the company with violating its anti-fraud provisions, saying the company misstated its revenue, expenses and net operating loss in an obvious attempt to overstate its growth and increased profitability.
But why did Luckin resort to fraud? Well, management would have benefited if they were not caught. By meeting the company’s earnings estimates, the staff involved in the scandal would have gotten a higher bonus as well as benefitted from the rising share price.
So, now that the staff involved in the scandal are out of Luckin, the SEC settlement gives the company a fresh new restart.
“This settlement with the SEC reflects our cooperation and remediation efforts, and enables the Company to continue with the execution of its business strategy,” Luckin CEO Dr. Jinyi Guo.
Now that the company is back on its feet, investors could still get rewarded by buying Luckin stock after its rise. What’s more, the company may even resume its strong growth ambitions in China.
Growth in China
In 2019, the former CEO of the company said it would open 10,000 stores in China. Of course, after it was delisted from the Nasdaq access to capital has been harder. Today it trades as an over-the-counter stock, which makes the 2019 expansion plan unlikely. Still, if it opens a fraction of that number and posted real profits this time, the stock will climb.
Luckin is burning just $20 million a quarter. It has nearly $800 million in cash, excluding the settlement.
It needs to build out more stores, quarter to quarter, throughout this year. Readers should note that the company has yet to update its website with the latest quarterly results. Buying any stock with such limited financial information is not ideal.
Still, as profit grows in the year ahead, the company could apply for a re-listing on the Nasdaq index. Getting that exposure back on the markets would send the stock higher than where it is currently trading.
By the time it is re-listed, new investors will not know about Luckin Coffee’s sordid past. Instead, it will value the stock based on its growing quarterly profits.
Risks to LKNCY Stock
Source: Chart Courtesy of StockRover.com
Luckin gets no recent coverage on Wall Street, as Tipranks reported. Analyst Eric Gonzalez of KeyBank is the last analyst to rate the stock with a “hold,” nine months ago.
Furthermore, the stock scores a 14/100 on value. As you can see in the chart, investors have many other restaurant and hospitality companies to consider instead.
Investing in China-based stocks is fraught with risks. The U.S. ban on companies in China is one risk but fraud is the bigger danger.
For Luckin, settling with the SEC removes the latter risk. It has cash on the balance sheet to re-formulate its growth strategy.
Management needs only to scale down its expansion ambitions in China. By concentrating on fewer store openings and running them profitability, Luckin investors will get rewarded in 2021.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.