When I last wrote about Cafe Luckin (OTCMKTS:LKNCY), investor sentiment was genuinely optimistic. However, it looks like the stock of Luckin Coffee is coming back down to earth.
This is not good news for investors who were hoping the stock will rise. However, that seems appropriate as it is now.
More specifically, there is a lack of transparency on the part of the company on the state of its activities. And without any relevant information, investors may rightly worry about the viability of the business.
A closer look at the Luckin coffee stock
One of the keys to Luckin’s initial success was that he was disruptive. Using the power of a mobile app, Luckin met the millennial Chinese consumer right where he was. This was important because it’s demographics that fuel the growing coffee culture in China.
In fact at the start of 2019, Forbes describes Luckin Coffee as the worst nightmare for Starbucks (NASDAQ:SBUX). But since being plunged into a crisis of its own creation, the company has lost any ground it has gained.
The problem is that right now there is less ground to be gained. Will Ashworth recently pointed out that those looking to invest in Luckin should look into the recent Starbucks fighting in China.
Despite its brand recognition and aggressive growth plans, the Covid-19 pandemic has been found to have cut wind to Starbucks’ growth plans, at least temporarily.
In the second quarter, Starbucks posted a 19% drop in same store sales. In the company’s last quarter, it reduced that drop to just 3%. However, this just illustrates the difference between coffee crops in the United States and China.
In previous articles, I have pointed out that Luckin’s accounting shenanigans have given Starbucks the opportunity to revamp their business model.
With that in mind, two things from Starbucks’ latest revenue call stood out. First, the company launched a new WeChat Mini program. And it has strengthened its digital partnership with Ali Baba (NYSE:BABA) to achieve sequential growth of active Starbucks Rewards members.
This doubled the sales of mobile orders during the quarter. And half of those sales come from its Mobile Order & Pay business. This is a direct response to the disruption created by Luckin Coffee.
However, there was something else that caught my attention. Starbucks was able to go from a 19% drop in same-store sales to a 3% drop. And one of the reasons for this was the innovation of new products. In this case, its new cloud tea platform.
I mention this because it bears repeating. China may be an emerging coffee culture. But it’s a well-established tea culture. Starbucks was keen to mention that the introduction of its cloud tea platform in China had boosted sales during its earnings call. This suggests that it was not a trivial reason.
What’s the new plan?
As you know, the stock of Luckin Coffee was written off earlier this year over allegations of fraud. Claims that the company was making sales have been proven to be true. And it hasn’t stopped hurting the stock ever since.
One of the problems for potential investors is that there has been no news from the company. Well, there was recent news. Company founder Lu Zhengyao sells his stake in Ucar.
Ucar focuses on rental cars and limousines. However, the $ 232 million Zhengyao will raise appears to be needed for his other businesses. There’s no indication he’s going to put any money into Luckin.
But maybe he should. With just $ 330 million in cash, the company looks overvalued.
Stay away from the stock of luckin coffee
I agree with Ian Bezek on this one, Luckin Coffee is not viable at this time. The business may have a path to future growth. But if they do, they are very slow to announce it.
And you would think that a company trying to recover from a major fraud scandal would be more open. They are not. And for this reason, you should stay away from the stock of Luckin Coffee.
As of the publication date, Chris Markoch does not hold (neither directly nor indirectly) any position in any of the stocks mentioned in this article.
Chris Markoch is a freelance financial writer who has covered the market for over six years. He has been writing for Investor Place since 2019.