Up by a massive 120% year to date, Luckin Coffee (LKNC.Y -1.52%) is trouncing the S&P 500 index, which has fallen 15% in the same period. Despite continued uncertainty in China, Luckin's business is booming on all cylinders. With an updated business model and fair valuation, the company and its latest bull run could be just getting started.
Luckin Coffee's jaw-dropping recovery
Hitting U.S. markets in 2019, Luckin Coffee was a Wall Street darling until its previous management fabricated $310 million worth of sales that same year. The fraud led to a domino effect that saw the company delisted from the NASDAQ and declaring Chapter 15 bankruptcy to reorganize its obligations. It emerged from restructuring in April 2022.
However, throughout this challenging process, Luckin never stopped growing and improving its business. The results of that commitment shine through in its impressive third-quarter earnings.
Net revenue soared 66% to $547.5 million through a mix of healthy same-store sales growth and the opening of 651 new stores, bringing its total to 7,846 locations. In comparison, rival Starbucks operates just 6,019 stores in China, despite having been in the country almost two decades longer.
Luckin's breakneck growth can be partially credited to its new franchise business model, which allows small business owners to open and manage their own outlets while buying supplies from Luckin. Revenue from these partnership stores more than doubled to $126.4 million in the period, and they represent 32% of Luckin's total store count.
Meanwhile, operating income totaled $82.3 million versus a loss in the prior-year period. And the operating income margin was 15%.
Scared to invest in China?
Investing in China is not for the faint of heart. The country's regulatory framework can seem harsh and unpredictable, especially as it relates to its zero COVID policy, which put 70 cities under full or partial lockdown in September, according to CNN. As a China-based company, Luckin Coffee is not immune from these challenges.
Management says the company is experiencing an average of around 500 daily store closures because of COVID restrictions as of November. While this number could increase in the future, it currently represents just over 6% of the company's footprint, which isn't enough to derail top-line growth. Luckin's diversified geographic footprint across China also prevents it from being overexposed to a lockdown in any specific city.
Image source: Getty Images.
According to the Washington Post, China's government has recently pledged to take "baby steps" toward exiting its zero COVID policy. And while investors may not want to take this commitment at face value, it is a good signal that normalization could be a long-term possibility.
Luckin Coffee stock is still a good deal
Because of the stock's stellar recent performance, investors might be running out of time to buy Luckin Coffee for cheap. That said, with a price-to-sales ratio (P/S) of just 3.5, it is still slightly more affordable than Starbucks, which trades for 3.6 times revenue. The valuation looks reasonable for a company still growing in high double digits. To put this in context, Starbucks' net revenue grew by just 3% in its most recently reported quarter compared to Luckin Coffee's 66%.
