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Why Luckin Coffee Stock Popped 26% Today

By Rich Smith – May 17, 2019 at 2:06PM

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Investors were enthusiastic about the fast-growing Chinese coffee chain on its IPO day, though it's far from turning a profit.

What happened

Luckin Coffee (LKNC.Y -6.74%) has set it sights on becoming the "Starbucks (SBUX 0.04%) of China"  -- notwithstanding the fact that there are already more than 3,000 Starbucks coffee shops in China. Today, in hopes of overtaking its better-known rival there a bit faster, Luckin made its IPO on the Nasdaq stock exchange.

The stock jumped out of the gate. Debuting at a $17 offer price, Luckin shares were up by about 26% to $21.40 as of 2 p.m. EDT.

Coffee cup with a smiley face in the foam

Image source: Getty Images.

So what

So what do we know about Luckin? My Foolish colleague Jeremy Bowman has the details.

Previewing the IPO last month, he noted that with 2,300 stores, Luckin is already fast-approaching Starbucks' level of ubiquity within the Chinese market. For every three Starbucks in China, there are about two Luckins competing with it -- not bad for a company that started less than two years ago (according to data from S&P Global Market Intelligence). And if the company's plans to open 2,500 new stores this year come to fruition, it could flip the script on Starbucks  before the calendar turns over to 2020.

Now what

The big question for investors is when -- or if -- all that rapid growth will permit Luckin to earn a profit.

With just $195 million in sales over the past four quarters, Luckin is still just a sliver of the size of Starbucks. The global coffee leader raked in over 100 times more revenue in the same period: $25.6 billion. More importantly to investors, Starbucks earned more than $3 billion on those sales -- and generated $10.5 billion in positive free cash flow.

In contrast, Luckin lost $304 million, and had $425 million in negative FCF. While management has publicly said that this is all part of the growth plan, investors betting on Luckin stock today had better consider the possibility that the more coffee this upstart sells, the more money it's going to lose.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$16.74 (-6.74%) $-1.21
Starbucks Stock Quote
$99.56 (0.04%) $0.04

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