With its shares up by a whopping 200% in the last 12 months, it might be surprising to know that Luckin Coffee (LKNC.Y -3.71%) is still trading for less than half its all-time high of $50, which was reached in early 2020.
Since then, the Chinese coffeeshop has been through a high-profile fraud case, a forced delisting from the Nasdaq index, and Chapter 15 bankruptcy. But with those issues resolved, and growth and profitability soaring, it could only be a matter of time before the stock blows past its previous levels.
First-quarter earnings were a home run
Luckin Coffee's first-quarter results highlight spectacular momentum. Revenue soared 85% to $646 million as the company opened 1,137 new stores, including its first two international locations in Singapore. With 9,351 total locations, Luckin is the largest Coffee chain in China. For context, U.S.-based rival Starbucks operates a little over 6,000 stores in China and almost 36,000 globally.
Luckin's bottom line is also improving, with net income jumping from 19 million renminbi to RMB 564.8 million ($82.2 million). The burgeoning profitability will give the company a layer of safety because it means it is less dependent on external sources of capital, such as high-interest debt or equity dilution (issuing more shares for cash).
Is there more room for growth?
Luckin's rapid growth rate suggests significant demand for its products in China. And this can be credited to its unique business model.
Unlike Starbucks, which aims to be a cozy "third place" for its guests, Luckin leans into the current zeitgeist of digitization -- embracing mobile ordering and cashier-free service. This strategy came just in time for the COVID-19 pandemic, which helped normalize the contact-free lifestyle.
Luckin Coffee's model has proven to be successful in China. And perhaps more importantly, its business is sufficiently differentiated from rivals to potentially compete in other jurisdictions.
Image source: Getty Images.
The company's expansion into Singapore will test the international viability of its introvert-friendly business model. And if Luckin succeeds now, it could open the door for geographic expansion farther afield -- into large wealthy markets like South Korea, Japan, and even the United States over the long term. For investors, this could translate to multibagger growth potential.
What about the valuation?
Despite incredible first-quarter results, Luckin Coffee's stock price is down 10% since mid-April. It is unclear what is behind the market's lackluster response. But it could be some residual skepticism from of its fraud scandal in 2020 where the previous management faked $300 million worth of sales. While it will take time for Luckin to regain the market's trust, the company has replaced its management and auditors and redesigned its corporate government structure to maximize transparency and enforce checks and balances.
Controlling ownership has also been transferred from management to outside shareholders, such as private equity firm Centurion Capital, which owns a majority stake in the company, helping to limit potential conflicts of interest.
But most importantly, investors should pay attention to Luckin Coffee's long-term potential instead of its short-term stock price volatility.
The coffee chain's unique business model is powering surging growth and profitability. And a successful international rollout could mean the expansion is just getting started. With a price-to-sales (P/S) multiple of just 4.3, Luckin's shares are incredibly cheap relative to its more mature rival. Starbucks trades for 4 times sales despite reporting a mere one-tenth of Luckin's top-line growth rate in the first quarter. Shares remain my highest-conviction buy.
