3 Reasons to Buy Luckin Coffee Stock

The name lucky coffee (OTC: LKNC.Y) probably makes you think about the dangers of investing in Chinese stocks. But now the corporate narrative is changing. Three years after the corporate crisis, during which it was discovered that its previous management had manufactured $300 million in sales, this controversial cafe has begun to reinvent itself.

1. Luckin Coffee turns a new leaf

Although it may take years (if ever) for Luckin Coffee to completely shed the stigma of its previous fraud, management has done a great job of turning the situation around. In April, the company emerged from Chapter 15 bankruptcy — a process designed to restructure its debt in the United States without materially affecting the company’s day-to-day operations.

Image source: Getty Images.

As part of the reorganization, Luckin Coffee and some of its U.S. creditors agreed to repay some of its $460 million debt in exchange for $320 million in cash plus new bonds and stock – in a bid to ‘improve Luckin’s capital structure and transform on a new leaf. The company also accepted a $180 million fine from the Securities and Exchange Commission (SEC) to settle accounting fraud charges for overstating its 2019 revenue.

Luckin Coffee’s new CEO Jinyi Guo acknowledges that some may still be skeptical of the company due to its history. And CNN reports that Luckin has brought in outside attorneys to review his operations.

As a Chinese company, Luckin is not necessarily held to the same reporting requirements as its US counterparts, but the high level of external scrutiny from lawyers, media and regulators should be enough to maintain honesty. of management.

2. Business is booming

Luckin Coffee’s first quarter earnings were a resounding success. Total net sales climbed 90% year-over-year to $379.3 million as the company benefited from a healthy 42% growth rate in same-store sales and opened 556 new stores, bringing its total number of stores to 6,580. Rival Starbucks operates just 5,654 locations in China, making Luckin Coffee the largest coffee chain in mainland China by number of stores.

Luckin Coffee’s unique business model could be behind its rapid growth. Unlike Starbucks, which owns and operates all of its Chinese locations, Luckin Coffee uses a franchise business model in which partner stores license its name and products in exchange for a profit-sharing agreement. In the first quarter, 1,905, or 29%, of Luckin stores are partner stores.

Luckin Coffee’s bottom line is also impressive. The company reported its first net profit of $3.1 million, reversing a net loss of about $35 million in the year-ago period. The shift to profitability highlights the potential of Luckin’s business model as it evolves its operations.

3. A rating too good to ignore

Despite its spectacular growth rate, with a price-to-sales (P/S) ratio of just 1.9, Luckin Coffee is valued significantly lower than its closest rival, Starbucks, which trades for 2.7 times sales. . The Chinese company’s controversial past will be a long-term overhang on its share price, but its booming business and super-cheap valuation make it a great choice for investors willing to tolerate some uncertainty about the upside potential. long-term growth that beats the market.

10 stocks we like better than Luckin Coffee Inc.
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and Luckin Coffee Inc. wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Equity Advisor Returns as of April 27, 2022

Will Ebiefung holds positions at Luckin Coffee Inc. The Motley Fool holds positions and recommends Luckin Coffee Inc. and Starbucks. The Motley Fool recommends the following options: $85 short calls in July 2022 on Starbucks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Back To Top