Up by almost 200% in the last 12 months, Luckin Coffee (LKNC.Y 2.92%) is rapidly recovering from fraud findings in 2020. With business booming, investor confidence returning, and profitability burgeoning, the stock looks set to recapture previous highs.
Trust is coming back
In 2020, Luckin Coffee's board launched an internal investigation that revealed its then-CEO, Jenny Zhiya Qian, fabricated 2.2 billion renminbi ($310 million) worth of 2019 sales. The finding set off a domino effect: Luckin Coffee went bankrupt, its stock crashed to penny stock status, and it was delisted from the Nasdaq Composite. But it quickly bounced back.
In April, Luckin emerged from all bankruptcy proceedings with its debt restructured and its business still intact. The company has a brand new team of management and auditors, and it seems very unlikely that the company would be dishonest again, considering all the scrutiny it is now under. The stock's boom rally reflects investors' rising trust. Additionally, this could be bolstered even further by a relisting on the Nasdaq -- a possibility its management is exploring, according to the Financial Times.
More importantly, however, the business is doing well -- very well.
Growth is firing on all cylinders
In the fourth quarter, revenue jumped 52% to $535.7 million, and the company continues to roll out new fully owned stores and partnership stores operated by franchisees. Luckin's growth can be credited to its unique business model. More than just a run-of-the-mill coffee shop, it embraces digitization, creating a cash- and cashier-free shopping environment, which appeals to its young, mobile audience.
Image source: Getty Images.
Management is betting this concept will appeal elsewhere in Asia, so it has begun an international expansion starting in Singapore. According to Straighttimes.com, Luckin has opened two Singaporean stores, with more in the works. And if successful, this could pave the way for Luckin to expand into more Asian markets like Thailand and Indonesia. All these countries are popular with Chinese tourists and diaspora, which could serve as a springboard for wider adoption by the population.
Such moves would dramatically boost Luckin's addressable market and help the company become a full-fledged restaurant multinational like its biggest rival, Starbucks, which operates in 80 countries.
Burgeoning profitability
Growth doesn't mean much unless it can be translated into profits, and Luckin Coffee is beginning to excel here, too. While previous management seems to have relied on a growth-at-all-costs strategy to rapidly gain market share, now the company is focused on creating sustainable value, and the impacts are showing on its bottom line. In 2022, Luckin's operating income jumped from a loss of RMB 539 million to a gain of RMB 1.2 billion ($167.6 million).
The profitability proves the sustainability of Luckin's business model and could eventually make it less reliant on outside capital like debt or equity dilution. And with a price-to-sales (P/S) multiple of 4.3, shares still look affordable, considering the company's rapid growth rate and improving bottom line. At $25 per share, it still has multi-bagger potential.
