Chinese coffee chain Luckin Coffee Inc (NASDAQ:LK) has seen its stock soar over the past days, and it is likely that many investors might be considering buying into the stock. Earlier this year, the Luckin stock had crashed after it emerged that the company’s executives cooked the books and reported fictitious sales to the tune of as much as $310 million in 2019.
Hence, there are compelling reasons why investors need to reconsider their investments. Here is a look at some of the factors that need to be considered.
Key Factors to Watch
One of the problems facing Luckin Coffee at this point is the fact that there is a distinct possibility of the stock being delisted from NASDAQ. The authorities in the United States have taken a far stronger stand with regards to Chinese companies, which are listed in the country’s top exchanges. Moreover, many exchanges have also come down hard on Chinese companies.
Hence, there is a possibility of Luckin being thrown out of NASDAQ, and if that happens, the share price will almost certainly crash. On the business side of things, it could be argued that Luckin has expanded too quickly for the Chinese market. Research from the University of Southern California suggests that per capita coffee consumption in China stands at only 5 cups a year.
By contrast, it stands at 400 cups per capita in the United States. Luckin opened as many as ten stores a day in the second quarter, and currently, it controls 6912 outlets in China. Such a footprint might not be sustainable, considering the size of the Chinese market. Lastly, considering the accounting fraud committed by the company, there are going to be doubts among many investors with regards to its balance sheet.
The company reported that it had liquidity to the tune of $1.64 billion and at the halfway mark in 2020, which exceeds its market capitalization of $590 million. The company might need to pay hefty fines due to accounting fraud and is also facing class-action lawsuits. Hence, the Luckin Coffee stock could decline in the coming weeks.