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Why Luckin Coffee Stock Surged 21.6% Wednesday

By Joe Tenebruso – Updated May 28, 2020 at 8:12AM

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Rumors of a buyout are swirling.

What happened

Shares of Luckin Coffee (LKNC.Y -0.71%) jumped more than 20% on Wednesday, continuing the stock's rally off its recent lows. 

So what

After being hit with an accounting scandal, executive terminations, and a Nasdaq delisting notice, Luckin Coffee's stock went on to suffer devasting losses of more than 95% from its all-time highs reached back in January.

However, the Chinese coffeehouse chain's stock has rallied sharply off its lows of $1.33 on May 22 in recent days. Shares now fetch $2.59 after their gains on Wednesday. 

The reason for the rally? Rumors of asset sales and a potential buyout could be fueling the stock's recent ascent. Reuters reported on May 24 that restaurant giant Yum China and Tencent-baked Tim Hortons could be exploring the possibility of purchasing some of Luckin Coffee's assets, including its popular mobile app and extensive customer data. Rumors that Luckin Coffee could be acquired are also swirling on Twitter and other social media sites. 

It's possible that these rumors are driving a short-squeeze, or forced buying by investors who bet against Luckin Coffee's stock. When a heavily shorted stock experiences a sharp rise in price, many short sellers are forced to buy the stock to close out their positions. This can serve to accelerate an upside move. 

Two people clinking coffee cups.

Luckin Coffee stock rose on Wednesday on rumors of a potential buyout deal. Image source: Getty Images.

Now what 

It's certainly possible that Luckin Coffee could be acquired at a price significantly higher than its current price. After all, the stock was trading above $50 per share just a few months ago.

However, most of what is currently driving its share price higher is based largely on conjecture -- and speculating on a potential buyout can often end badly for investors when the fundamentals of the underlying business are subpar.

Thus, owning Luckin Coffee stock right now is a high-risk endeavor. It could pay off handsomely if the beleaguered Chinese coffeehouse chain is acquired, but investors could also be completely wiped out if Luckin Coffee is forced to enter bankruptcy proceedings.

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

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