Why You Shouldn’t Touch Luckin Coffee with a 10-Foot Pole

Stocks to sell

Chinese coffee chain Luckin Coffee (OTCMKTS:LKNCY) has been in the news for a number of reasons. Most recently, it announced the possibility of exiting bankruptcy by raising capital and securing a new restructuring deal. Now post-announcement, LKNCY stock has been doing well and is up some 50% since its Mar. 15 close.

close up luckin coffee's logo coffee brand in Shanghai, June 2019.

Source: NewsToday / Shutterstock.com

Over the past year, LKNCY stock went from an annual high of more than $29 last March to an all-time low of 95 cents. The stock has remained volatile over the last month and is exchanging hands at $8.79 today. 

Of course, the restructuring agreement and the possible $250 million raise could help things. However, the company has not provided any details about the price at which the investment will be made. So, the problem is that this agreement may not end up fully bailing Luckin out.

The numbers are not clear and the future looks dark. As such, I would not recommend buying Luckin shares given the current position of the company. Here’s why you shouldn’t buy LKNCY.

LKNCY Stock: The Current High Is Temporary

Only a year since its first-time sale on the Nasdaq Exchange, Luckin Coffee faced an investigation for overstating its revenues, losses and expenses by hundreds of millions of dollars. In fact, unaudited accounts in three quarters of 2019 were found to be manipulated. The company had fabricated more than $300 million in sales.

All we know is that the accounts need to be balanced. And if the company’s revenue and cost of sales have been misstated, that will have an impact on other metrics like its cash balance.

In addition to the corrections that need to be made, though, the company has to pay fines of $9 million to the Chinese government and $180 million to the U.S. Securities and Exchange Commission (SEC). Now, perhaps it has adequate cash on hand to make the payment. But given Luckin’s record, we do not even know if its third-quarter cash-and-equivalents figure of $775 million is accurate.

Essentially, this is a red flag investors must not ignore. Even if only one number is incorrect at first, it will lead to another. Of course, management will do everything to keep the company running, but it will take time to see the results.

Trying to repair itself, the company filed for bankruptcy, leading to more downside in LKNCY stock. True, one must remember that it is not a liquidation bankruptcy. Instead, Luckin is restructuring and already on its way to an agreement. But that will also likely take time to complete.

Bottom Line

All in all, I think that the current high in this stock is temporary. The game is over for Luckin Coffee.

If you look at the long-term picture, there is not much to be impressed about with this name. For instance, the company has seen a significant decline in its number of stores. Plus, there’s no way to identify its actual financials until it releases new statements. For now, we can only speculate.

Currently, the rise in the stock is only due to its recent agreement. But the stock could really dip anytime soon.

And despite a bankruptcy clearing the way and a new management team in place, it will also take time for Luckin’s financial situation to improve. We don’t know how good or bad the company did in 2020 nor do we know the pandemic’s impact on its sales.

So, at the very least, investors should wait for the company to conclude its bankruptcy proceedings before investing. Until then, steer clear of LKNCY stock. 

On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Vandita Jadeja is a CPA and a freelance financial copywriter who loves to read and write about stocks. She believes in buying and holding for long term gains. Her knowledge of words and numbers helps her write clear stock analysis.

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