An Unlucky Investment? By TipRanks

An Unlucky Investment? By TipRanks

© Reuters. Luckin Coffee: An Unlucky Investment?

Chinese coffee chain Luckin Coffee (OTC:), a company with negative margins, shouldn’t be trading at a higher multiple than Starbucks (NASDAQ:), 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:).

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.

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