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Why Luckin Coffee Stock Popped Today

By Jeremy Bowman – Feb 4, 2020 at 5:14PM

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Investors seemed to put the short-seller report behind them.

What happened

Shares of Luckin Coffee (LKNC.Y -5.12%) were percolating higher today as the stock rebounded from last Friday's attack from a short seller. After Luckin said yesterday that the report was false and that its allegations were misleading, the stock gained on a bullish analyst note and a broader surge in Chinese stocks.

Shares closed up 15.6%.

Two Asian women sitting in a cafe drinking coffee

Image source: Getty Images.

So what

This morning, Needham raised its price target on Luckin from $27 to $40, in response to the company's filing with the Securities and Exchange Commission, which denied any wrongdoing as alleged in the short-seller report. Analyst Vincent Yu also said he was bullish on the company's vending machine rollout and its tea partnership initiatives.

Yesterday, Luckin categorically denied all of the allegations in the 89-page report, calling the evidence unsubstantiated and the methodologies flawed. Other industry analysts also came to the company's defense, insisting that some of the claims, like that the short-seller watched 11,000 hours of video, seemed hard to believe.

The stock whipsawed yesterday as the market struggled to interpret that response amid news that Chinese stock markets were crashing on fears of coronavirus. However, today the S&P 500 surged as fears about the coronavirus seemed to be fully digested, and stocks recovered recent losses. China stocks in general jumped today, showing that investors may have thought they were oversold.

Now what

Luckin investors should feel free to put the short-seller attack behind them unless further evidence emerges. But the coronavirus remains a real concern, as the outbreak continues to spread and has already forced Luckin to close a number of its stores.

Much of Luckin's growth is already priced in, considering the company is valued at more than $9 billion, but it's still losing money and sales won't reach $1 billion in 2019. There's no question that the company is seeing meteoric growth, which explains the valuation, but Luckin still has much to prove.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of Luckin Coffee. The Motley Fool has a disclosure policy.

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