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Why Luckin Coffee Stock Dropped 30% Today

By Joe Tenebruso - May 22, 2020 at 1:06PM

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Despite brutal losses, more pain could lie ahead for investors.

What happened

Shares of Luckin Coffee (LKNC.Y 1.09%) plummeted on Friday as myriad negative factors continued to weigh on the beleaguered Chinese coffeehouse chain.

As of 1:36 p.m. EDT, Luckin's stock was down more than 30%.

So what

Luckin Coffee's stock crashed in April after the company disclosed that it was investigating its chief operating officer for allegedly inflating sales by hundreds of millions of dollars. Several weeks later, Luckin fired COO Jian Liu and CEO Jenny Zhiya Qian due to their alleged roles in the scandal.

Then on May 19, Luckin received a delisting notice from Nasdaq, citing the company's fabricated sales transactions and investors' concerns about them. Luckin requested a hearing, which is expected to occur in approximately 30 to 45 days.

The stock resumed trading on May 20, ending a trading halt that Nasdaq had enacted on Luckin's shares on April 7 after news of the accounting scandal broke. Luckin's stock price went on to plunge further once more investors had the opportunity to sell their shares.

A downwardly sloping stock chart.

Luckin Coffee's stock plunged on Friday. Image source: Getty Images.

Now what

Despite the stock's devastating losses in recent weeks, there's a strong possibility that even more pain could lie ahead for Luckin Coffee's shareholders. Some investors, such as Quo Vadis Capital president John Zolidis, believe that the end result of the company's accounting scandal could be a "complete wipe-out for equity holders."

"Leaving aside the fraud, the figures that are available suggest that Luckin Coffee never had a viable business model," Zolidis told MarketWatch on Thursday. "The company grew too fast and acquired customers via promotional offers, without ever proving the economics."

To Zolidis' point, Luckin Coffee has failed to generate sustained operating profits during its short life as a public company -- and with its mounting losses, it's possible it could descend into bankruptcy before it's ever able to do so.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool has a disclosure policy.

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