Please ensure Javascript is enabled for purposes of website accessibility

Why Luckin Coffee Stock Dropped 30% Today

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$13.93 (1.09%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.