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Why Luckin Coffee Stock Surged Thursday

By Jeremy Bowman – Updated Jun 5, 2020 at 8:27AM

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Shares of the Chinese coffee chain continued to climb as day traders see an opportunity.

What happened

Shares of Luckin Coffee (LKNC.Y -1.32%) continued to rally today as some investors believe the low-priced Chinese coffee chain is a bargain after revelations of fraud caused the stock to plunge. Though there was no news out on the stock today, the shares rallied for the third day in a row and have now gained more than 60% since Monday as a potential short squeeze could also be lifting the stock.

As of 11:32 a.m. EDT on Thursday, shares were up 29.1%.

Two women drinking coffees at a table

Image source: Getty Images.

So what

Shares of the fast-growing Chinese coffee chain imploded after the company admitted it had faked transactions to inflate its sales. That led to trading in the stock being halted on the Nasdaq for over a month and shares losing about 90% of their value. The exchange said it planned to delist Luckin because of the fabricated transactions and failure to disclose material information. 

Last week, a Wall Street Journal report revealed how the company created fake buyers and even made up a fictitious employee to create as much as $140 million in fabricated transactions. 

Despite the fraud, Luckin is still a business and therefore has value. Scrupulous investors have fled the stock since they no longer trust management, but others see an opportunity in a stock that was trading for less than $2 recently, and has managed to open thousands of stores in China in little more than two years.

Now what

Luckin shares are likely to remain volatile, at least while it's still trading on the Nasdaq, as short-term traders have rushed into the stock spying an opportunity to make a quick gain. While there may be some value in the company at this point, the stock is very risky after the fraud revelations, and we still don't know how Luckin plans to ensure that future reporting is accurate, nor do we know if the company will have to pay any fines or suffer any related punishments. The scandal also prompted threats from the U.S. government to delist all Chinese companies if they didn't comply with certain reporting standards.

Luckin could recover from the scandal, but the delisting is likely to impact the stock price. Long-term investors are better off skipping this one.

 

Jeremy Bowman 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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Luckin Coffee Inc. Stock Quote
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