Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Luckin Coffee: An Unlucky Investment?

Stock MarketsSep 26, 2021 12:00PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Luckin Coffee: An Unlucky Investment?

Chinese coffee chain Luckin Coffee (OTC:LKNCY), a company with negative margins, shouldn’t be trading at a higher multiple than Starbucks (NASDAQ:SBUX), according to Quo Vadis president John Zolidis.

I am bearish on this stock. (See Luckin Coffee stock charts on TipRanks)

Disconnect between Market Valuation and Fundamentals

Zolidis, who sounded the alarm early about the ailing chain’s woes, made this comment following LKNCY's filing of a 10k for 2020 and settling of various lawsuits. At the same time, the company did not provide any quarterly P&Ls.

“The bottom-line is that LKNCY is currently valued by the market at $5B, which is roughly 5x our 2022 revenue estimate,” Zolidis said. “This is despite the fact that 2020 EBITDA margins were negative 39%. Even if we take the best quarter of 2020, we estimate a RLM of 1% and an EBITDA margin of negative 20%. Also worth noting, LKNCY burned through $1.1B of fraudulently acquired funds in 2019 and 2020.”

Luckin has no analyst following on Wall Street. TipRanks assigns a Smart Score of 5 to the company, citing decreased hedge fund activity, low investor and blogger sentiment, and lack of fundamental and insider data availability.

Meanwhile, TipRanks cites the rise of risks surrounding the company. The company has cited a total of 101 potential risks.

A Change in Strategy

For years, the Beijing-based coffee chain was opening coffee shops at a feverish pace, trying to match and surpass industry leader Starbucks.

The problem is that the two companies have different store concepts. Starbucks' store concept is the “third place,” a comfortable place where people can enjoy mixed espresso drinks with friends and associates away from home and work. This store setting makes the demand for Starbucks products inelastic, meaning that it can charge a premium price for its products over the competition and maintain profitability.

Luckin’s store concept is “coffee to go,” where people can pick up coffee. Unfortunately, this setting makes the demand for its products elastic, meaning that it cannot charge premium prices for its products and maintain profitability. That’s at the root of the company’s woes.

To turn things around, its leadership has been closing down its worst-performing stores, scaling back on promotions, and reducing operating expenses. While this is the right strategy, Zolidis thinks it won’t work. “Customer transactions fell at a double-digit rate every quarter in 2020,” he says. “Has this continued into 2021? Covid is probably not helping a business that chose to put most locations in office towers.“

While he thinks that Luckin’s strategy won’t work, he’s still concerned about the company’s valuation going forward. His model suggests that Luckin gets a positive EBITDA by 2023, but he thinks it doesn’t make sense for a business with this financial profile to trade at a higher multiple than Starbucks or Shake Shack (NYSE:SHAK).

Bottom Line

In short, Luckin is a money-losing coffee chain with a high market valuation in search of a strategy for its survival. Investors chasing after its shares should be reminded that hype is never a good substitute for due diligence.

Disclosure: At the time of publication, Panos Mourdoukoutas had no position in Luckin Coffee.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Luckin Coffee: An Unlucky Investment?
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
Loc Lee
Loc Lee Sep 29, 2021 12:17AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
This Zolidis guy is either incompetent or a liar. LK files 20F, not 10K. More importantly, he claimed that LK's "customer transactions dropped double digit every quarter in 2020". This is blatantly wrong. LK's transacting customers increased 2 out of 4 qtrs in 2020 and only had 1 qtr suffering double digit drop. And LK's total transactions increased 3 out of 4 qtrs in 2020, only 1 dropped 5%, not double digit. And LK's revenue increase every qtr in 2020! Moreover, LK increased its margin tremendously by raising average drink price to 13-14 RMB late 2020 compared to less than 10 RMB in 2019 - this improves LK's margin and profitability tremendously. 2020 LK still lost a lot because of pandemic and various one-time costs. But its 2021 is looking incredibly good so far. From various reports by media and users in China, it seems extremely likely that LK will hit $1B revenue in 2021, not 2022! Its growth is tremendous and from leaked info LK has been profitable since May 2021.
Loc Lee
Loc Lee Sep 29, 2021 12:04AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
This Zolidis guy is so ignorant it's scary. It's OK if he couldn't follow Chinese reports on the # of shops or sales of extremely popular Luckin drinks in 2021, but at least read and study financial reports right! LK files 20F, not 10K. It's a technical difference but a knowledgeable person wouldn't have mixed it up. Now to the actual content of 20F, he put out blatant lies like "Customer transactions fell at a double-digit rate every quarter in 2020", which the fact was that two quarters in 2020 the # of transacting customers increased, and only 1 qtr decreased double digit. The total # of transactions increased 3 out of 4 qtrs in 2020, only 1 qtr dropped 5%. His other numbers were all having glaring mistakes. He's either a liar or hopelessly incompetent analyst.
khalid mahmood
khalid mahmood Sep 26, 2021 11:31PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Most ignorant guy who has done zero research on the company. He should be banned
Rob Omes
Rob Omes Sep 26, 2021 6:21PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Sorry, you should be jailed for writing nonsense. Amazing how you manipulate the facts. Luckin and Starbucks are not to compare. Not with their servicepoints as the have other approaches and SB is international, Luckin operates in China. You probably don't know about the Chinese market which is different from the place (some US village in the county) where you live. Go home and do your homework before writing another article. Just a question... Do you live from writing?
Dustin Waller
Dustin Waller Sep 26, 2021 4:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Where do you see their customer transactions drop double digits? They go up! Here is a link to that page on their 20-f.. https://ibb.co/H4BXCxM Luckin is going to grow so fast after the winter olympics!
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email