Chinese coffee chain Luckin Coffee Inc – ADR (NASDAQ: LK) had been in a lot of trouble due to accounting fraud, and trading had been halted on its stock on NASDAQ for as long as a month. There was a widespread belief that the stock was going to crash as soon as it started trading.
However, that did not happen, and instead, the Luckin stock rallied quite strongly. In recent days, the stock has rallied almost fourfold, and trading volumes are back to the old levels. Hence, it could be worthwhile to take a closer look at the Luckin stock.
Delisting from Nasdaq?
Firstly, there is a danger that the stock might be delisted from NASDAQ due to its fraudulent activities. However, that is not going to bankrupt the company. Back in January, the company raised as much as $1 billion through a secondary offering. Considering the fact that the company still has millions of dollars in its cash balance, it is doubtful whether the stock is going to go to zero.
While it is true that the stain of accounting fraud is going to bug the company, it should be noted that Luckin actually operates 4000 stores in China, and theoretically, it does have a slim chance of actually making a comeback.
Many analysts have asserted that the stock is going to eventually go to zero, but that might not actually be the case. The company’s stores do have value, and in addition to that, Luckin’s hefty cash balance probably makes up as much as $2 a share in value. Moreover, if the management is successful in cleaning up the business, then the stock could eventually make a comeback.
However, amidst all that, it should be noted that the accounting fraud is going to bug Luckin and make it difficult to raise more cash. While the company does have a lot of cash, it has not been able to generate either profits or positive cash flow.