© Reuters. Luckin Coffee is still out of luck
chinese coffee chain Lucky coffee (OTC 🙂 lack of time to restructure its convertible debt and set up its business model, according to John Zolidis, president of Quo Vadis Capital. As a result, he thinks the stock is overvalued and awards it a sell.
“LKNCY did not provide audited financial data for any period after 2019,” he said. In addition, the stock has recently been affected by a rule that prevents certain brokers from authorizing orders (other than closing trades) or providing quotes. Our view remains that the market cap is too high by compared to the profit potential (so far unproven) of this business. “
TipRanks gives Luckin Coffee a smart score of 5 out of 10, citing neutral investor sentiment, bearish blogger opinions and declining hedge fund activity. I am neutral on the stock.
The only two positive factors are timeliness and technicalities, which suggests that Luckin’s stock is popular among dynamic, short-term traders and investors.
Zolidis is one of the few analysts to follow the stock closely, sounding the alarm bells for its bleak finances before its stocks collapse. (See LKNCY stock charts on TipRanks)
Why the action is a sale
In a research note in July, Zolidis explained its sell rating for Luckin shares.
“Using the information we have, including the forecast from the JPL report, we estimate that Luckin could break even in 4Q22. The year 2023 could be the first year of positive EBITDA, some EPS and FCF positive, but not by much. So what are LKNCY shares worth? At yesterday’s close of $ 11 per share, the EV (noting that cash balances are still subject to lawsuits etc. .) was $ 3.4 billion, which implies an EV / 2023 EBITDA multiple of 24x. “
Apparently, investors are looking for quick business gains, ignoring several risks the company faces, such as financial and corporate risks, legal and regulatory risks, and production risks.
Then there are the True Believers, who believe Luckin Coffee is the next Starbucks (NASDAQ :). There is merit to this argument. Starbucks was very successful in China, and Luckin tried to catch up with it by opening new stores quickly in its early days. This is how it reached 6,500 stores in 2020, 2,000 more than Starbucks.
Luckin ain’t, can’t be another Starbucks
Luckin Coffee is not another Starbucks just because it has a business model that rivals Starbucks. It is not a “third place” where people will share a cup of coffee with friends and business associates away from home and office. It’s something the American cityscape was missing in the 1980s and 1990s, as middle-aged baby boomers tried to balance work and family life.
Luckin Coffee is a collection of coffee outlets that deliver coffee everywhere, competing on technology and price, rather than “affordable luxury”.
Luckin Coffee also operates in a different social context than Starbucks. China already has its dim sum places where people can socialize with friends and colleagues, have a light breakfast or lunch, and sip tea.
Meanwhile, the company’s business model turns coffee into a commodity – a product that anyone can sell. Economists know full well that price wars are detrimental to a business in the long run. They erode profit margins to the point that the return on invested capital is equal to or less than what money can earn elsewhere.
Summary and conclusions
Hope is not a strategy. So goes the old Wall Street aphorism.
Buying stocks of companies with the hope that they will someday beat the market leaders is a long chance for superior earnings. Unfortunately, that could end up being the case for Luckin Coffee.
The company has yet to provide investors with reliable information on its current situation, and its business model hardly matches its main competitor, Starbucks.
Disclosure: At the time of publication, Panos Mourdoukoutas held shares of Starbucks.
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